<PAGE> 1
SCHEDULE 14A INFORMATION
PROXY STATEMENT PURSUANT TO SECTION 14(a) OF
THE SECURITIES EXCHANGE ACT OF 1934
Filed by the Registrant [X] [ ] Confidential, for Use of the Commission
Only (as permitted by Rule 14a-6(e)(2))
Filed by a Party other than the Registrants [ ]
Check the appropriate box:
[ ] Revised Preliminary Proxy Statement
[X] Definitive Proxy Statement
[ ] Definitive Additional Materials
[ ] Soliciting Material Pursuant to Rule 14a-11(c) or Rule 14a-12
DEVON ENERGY CORPORATION
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(Name of each Registrant as Specified in its Charter)
N/A
- --------------------------------------------------------------------------------
(Name of Person(s) Filing Proxy Statement, if other than the Registrant)
Payment of Filing Fee (Check the appropriate box):
[ ] No fee required.
[ ] Fee computed on table below per Exchange Act Rules 14a-6(i)(l) and 0-11.
(1) Title of each class of securities to which transaction applies:
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(2) Aggregate number of securities to which transaction applies:
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(3) Per unit price or other underlying value of transaction computed pursuant
to Exchange Act Rule 0-11:
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(4) Proposed maximum aggregate value of transaction:
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(5) Total fee paid:
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[ ] Fee paid previously with preliminary materials.
[X] Check box if any part of the fee is offset as provided by Exchange Act Rule
0-11(a)(2) and identify the filing for which the offsetting fee was paid
previously. Identify the previous filing by registration statement number,
or the Form or Schedule and the date of its filing.
(1) Amount Previously Paid:
$154,045.00
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(2) Form, Schedule or Registration Statement No.:
Preliminary Proxy filed on Schedule 14A
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(3) Filing Party:
Devon Energy Corporation
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(4) Date Filed:
July 29, 1998
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As filed with the Commission on November 6, 1998.
<PAGE> 2
DEVON LOGO
November 6, 1998
Dear Fellow Stockholder:
On June 29, 1998, Devon Energy Corporation and Northstar Energy Corporation
announced a plan to combine the two companies. If it is completed, this
combination will have a significant impact on Devon. We expect that our oil and
gas reserves will increase by 70% and that our undeveloped property inventory
will more than triple. However, Devon's debt will also increase by $325 million.
In addition we will issue new shares which are exchangeable for approximately
15.5 million additional shares (subject to adjustment) of Devon common stock.
Devon will also assume Northstar's stock option plan. After the transaction
Northstar will become a subsidiary of Devon, and two directors designated by
Northstar will become part of an expanded eleven-person Devon board of
directors. Since all of Northstar's operations are in Canada, the combination
will substantially alter Devon's geographic focus. Some 46% of Devon's total
reserves will be in Canada, while 54% will be in the U.S.
In connection with the proposed Devon/Northstar combination, you are
cordially invited to attend a special meeting of stockholders of Devon to be
held at the Community Room, Bank of Oklahoma, Robinson Avenue at Robert S. Kerr,
Oklahoma City, Oklahoma, at 10:00 a.m. (local time) on December 9, 1998. At the
Devon meeting, you will be asked to (i) approve the Combination Agreement
between Devon and Northstar, (ii) consider and vote upon an amendment to Devon's
Certificate of Incorporation to designate a class of stock as Special Voting
Stock and (iii) consider and vote upon an amendment to the Devon Energy
Corporation 1997 Stock Option Plan to increase the number of shares available
for grant under such plan by one million shares. Details of these proposals are
contained in the materials enclosed.
Devon's board of directors has carefully considered and has unanimously
approved the terms and conditions of the Combination Agreement and recommends
that the stockholders approve the proposals to be presented at the Devon
meeting. In reaching this conclusion, the board considered, among other things,
the opinion of Merrill Lynch, Pierce, Fenner & Smith Incorporated, an investment
banking firm engaged by Devon. Their opinion states that, as of June 29, 1998,
and based on and subject to the factors and assumptions set forth therein, the
exchange ratio set forth in the Combination Agreement is fair, from a financial
point of view, to Devon. A copy of the Merrill Lynch opinion, including their
assumptions, qualifications, and other matters contained therein, is included in
the materials enclosed.
THE OBLIGATIONS OF DEVON AND NORTHSTAR TO CONSUMMATE THE COMBINATION
AGREEMENT ARE SUBJECT TO, AMONG OTHER CONDITIONS, THE APPROVAL OF THE
STOCKHOLDERS OF DEVON OF THE COMBINATION AGREEMENT AND THE AMENDMENT TO DEVON'S
CERTIFICATE OF INCORPORATION AT THE MEETING. If either of these proposals is not
approved, none of the proposals to be presented at the Devon meeting will be
implemented and the Combination will not be consummated. THE BOARD OF DIRECTORS
UNANIMOUSLY RECOMMENDS THAT YOU VOTE FOR THE PROPOSALS TO BE PRESENTED AT THE
DEVON MEETING.
IN VIEW OF THE IMPORTANCE OF THE ACTIONS TO BE TAKEN AT THE MEETING, YOU ARE
URGED TO READ THE ATTACHED MATERIALS CAREFULLY, AND, REGARDLESS OF THE NUMBER OF
SHARES YOU OWN, COMPLETE, SIGN, DATE AND RETURN THE ENCLOSED PROXY CARD PROMPTLY
IN THE ACCOMPANYING PREPAID ENVELOPE. YOU MAY, OF COURSE, ATTEND THE DEVON
MEETING AND VOTE IN PERSON, EVEN IF YOU HAVE PREVIOUSLY RETURNED YOUR PROXY
CARD.
Sincerely,
J. LARRY NICHOLS SIGNATURE
J. Larry Nichols
President and Chief Executive
Officer
<PAGE> 3
TABLE OF CONTENTS
<TABLE>
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<S> <C>
DISCLOSURE REGARDING FORWARD-LOOKING STATEMENTS.... 2
AVAILABLE INFORMATION.............................. 2
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE.... 3
United States.................................... 3
Canada........................................... 4
SUMMARY............................................ 5
GLOSSARY OF TERMS.................................. 28
RISK FACTORS....................................... 35
COMPARATIVE PER SHARE DATA......................... 41
REPORTING CURRENCIES AND ACCOUNTING PRINCIPLES..... 42
EXCHANGE RATE OF CANADIAN AND U.S. DOLLARS......... 42
COMPARATIVE MARKET PRICE DATA...................... 43
DEVON-NORTHSTAR UNAUDITED PRO FORMA COMBINED
FINANCIAL INFORMATION............................ 44
UNAUDITED U.S. GAAP FINANCIAL
INFORMATION -- NORTHSTAR......................... 61
THE MEETINGS....................................... 70
Devon............................................ 70
Northstar........................................ 71
THE COMBINATION.................................... 73
Background....................................... 73
Reasons for the Combination...................... 75
Opinions of Financial Advisors................... 79
Opinion of Merrill Lynch....................... 79
Opinion of Morgan Stanley...................... 86
Opinion of RBC DS.............................. 91
Interests of Certain Persons in the
Combination.................................... 95
Combination Mechanics and Description of
Exchangeable Shares............................ 96
The Combination Agreement........................ 102
Other Agreements................................. 106
Court Approval of the Arrangement and Completion
of the Combination............................. 106
Anticipated Accounting Treatment................. 107
Business Combination Costs....................... 107
Procedures for Exchange by Northstar Shareholders
and Northstar Optionholders.................... 107
Stock Exchange Listings.......................... 108
Eligibility for Investment in Canada............. 108
Regulatory Matters............................... 109
Resale of Exchangeable Shares and Devon Common
Stock Received in the Combination.............. 110
BUSINESS OF DEVON.................................. 112
BUSINESS OF NORTHSTAR.............................. 112
THE COMPANY AFTER THE COMBINATION.................. 113
General.......................................... 113
Reserves and Leasehold........................... 113
Core Operating Areas in the United States........ 116
Core Operating Areas in Canada................... 119
Directors and Executive Officers................. 121
PRINCIPAL HOLDERS OF SECURITIES.................... 123
DEVON CAPITAL STOCK................................ 125
NORTHSTAR SHARE CAPITAL............................ 127
DEVON'S SELECTED FINANCIAL DATA.................... 130
DEVON MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS.... 130
NORTHSTAR'S SELECTED FINANCIAL DATA................ 131
</TABLE>
<TABLE>
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NORTHSTAR MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS.... 136
INCOME TAX CONSIDERATIONS TO NORTHSTAR SHAREHOLDERS
AND OPTIONHOLDERS................................ 147
Canadian Federal Income Tax Considerations to
Northstar Shareholders and Optionholders....... 147
Northstar Shareholders Resident in Canada...... 148
Northstar Shareholders Not Resident in
Canada....................................... 152
Modification of Northstar Options.............. 152
United States Federal Income Tax Considerations
to Northstar Shareholders...................... 153
Shareholders that are United States Holders.... 153
Shareholders that are Not United States
Holders...................................... 158
COMPARISON OF STOCKHOLDER RIGHTS................... 159
Vote Required for Extraordinary Transactions..... 159
Amendment to Governing Documents................. 159
Dissenters' Rights............................... 160
Oppression Remedy................................ 160
Derivative Action................................ 161
Director Qualifications.......................... 161
Fiduciary Duties of Directors.................... 161
Indemnification of Officers and Directors........ 161
Director Liability............................... 162
Anti-Takeover Provisions and Interested
Stockholder Transactions....................... 162
Share Rights Plan................................ 163
DISSENTING NORTHSTAR SHAREHOLDERS' AND NORTHSTAR
OPTIONHOLDERS' RIGHTS............................ 163
PROPOSED CERTIFICATE AMENDMENT..................... 165
PROPOSED OPTION PLAN AMENDMENT..................... 166
AUDITORS, TRANSFER AGENT AND REGISTRAR............. 168
LEGAL MATTERS...................................... 168
EXPERTS............................................ 169
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS......... FS-1
</TABLE>
<TABLE>
<S> <C>
ANNEXES:
ANNEX A -- Form of the Arrangement Resolution
ANNEX B -- Amended and Restated Combination Agree-
ment (certain exhibits to which are
included as Annexes D, E, F and G to this
Joint Proxy Statement)
ANNEX C -- Interim Order
ANNEX D -- Proposed Amended and Restated Certificate
of Incorporation of Devon
ANNEX E -- Plan of Arrangement and Exchangeable
Share Provisions
ANNEX F -- Form of Support Agreement
ANNEX G -- Form of Voting and Exchange Trust
Agreement
ANNEX H -- Merrill Lynch, Pierce, Fenner & Smith
Incorporated Fairness Opinion
ANNEX I -- Morgan Stanley & Co. Incorporated
Fairness Opinion
ANNEX J -- RBC Dominion Securities Inc. Fairness
Opinion
ANNEX K -- Section 184 of the ABCA
ANNEX L -- Additional Documents Included:
</TABLE>
Devon's Form 10-K for the year ended December 31, 1997.
Devon's Form 10-Q for the quarter ended June 30, 1998.
Devon's Form 10-Q/A for the quarter ended June 30, 1998.
Proxy Statement for Devon's 1998 Annual Meeting of Stockholders.
Northstar's Revised Annual Information Form for the year ended December 31,
1997.
Northstar's Management Proxy Circular dated March 27, 1998.
IN THIS JOINT PROXY STATEMENT, UNLESS OTHERWISE INDICATED, ALL DOLLAR AMOUNTS
ARE EXPRESSED IN U.S. DOLLARS. SEE "REPORTING CURRENCIES AND ACCOUNTING
PRINCIPLES" AND "EXCHANGE RATE OF CANADIAN AND U.S. DOLLARS."
<PAGE> 4
DEVON ENERGY CORPORATION
20 NORTH BROADWAY, SUITE 1500
OKLAHOMA CITY, OKLAHOMA 73102
---------------------
NOTICE OF SPECIAL MEETING OF STOCKHOLDERS
TO BE HELD ON DECEMBER 9, 1998
---------------------
Notice is hereby given that a special meeting of stockholders (the "Devon
Meeting") of Devon Energy Corporation ("Devon") will be held at 10:00 a.m.
(local time) on December 9, 1998, at the Community Room, Bank of Oklahoma,
Robinson Avenue at Robert S. Kerr, Oklahoma City, Oklahoma, for the following
purposes:
1. To consider and vote upon a proposal to approve the Amended and
Restated Combination Agreement dated as of June 29, 1998 (the "Combination
Agreement") between Devon and Northstar Energy Corporation ("Northstar"),
and the transactions contemplated thereby (the "Combination"), as more
fully described in the accompanying Joint Management Information Circular
and Proxy Statement;
2. To consider and vote upon a proposal to approve and adopt an
amendment to Devon's Certificate of Incorporation to authorize a class of
Special Voting Stock consisting of one share (the "Certificate Amendment");
3. To consider and vote upon a proposal to amend Devon's 1997 Stock
Option Plan to increase the number of shares available for grant under such
plan from two million to three million (the "Option Plan Amendment"); and
4. To transact such other business as may properly be presented to the
Devon Meeting or any adjournments thereof.
The respective obligations of Devon and Northstar to consummate the
Combination Agreement and the Combination are subject to, among other
conditions, the approval of the stockholders of Devon of the Combination
Agreement and the Combination and the Certificate Amendment (proposals 1 and 2
above) at the Devon Meeting. If either one of these two proposals is not
adopted, then none of the proposals to be presented at the Devon Meeting will be
implemented and the Combination will not be consummated. The Combination is not
subject to the approval of the Option Plan Amendment (proposal 3 above).
Only stockholders of record at the close of business on October 27, 1998,
will be entitled to notice of and to vote at the Devon Meeting and any
adjournments thereof. A list of stockholders of Devon entitled to vote at the
meeting will be available for inspection during normal business hours for the
ten days prior to the Devon Meeting at the offices of Devon and at the time and
place of the meeting.
PLEASE COMPLETE, DATE, SIGN AND PROMPTLY RETURN YOUR PROXY SO THAT YOUR
SHARES MAY BE VOTED IN ACCORDANCE WITH YOUR WISHES AND SO THAT THE PRESENCE OF A
QUORUM MAY BE ASSURED. THE GIVING OF SUCH PROXY DOES NOT AFFECT YOUR RIGHT TO
VOTE IN PERSON IN THE EVENT YOU ATTEND THE MEETING. YOU MAY REVOKE YOUR PROXY AT
ANY TIME BEFORE IT IS EXERCISED AT THE DEVON MEETING.
By Order of the Board of Directors,
Marian J. Moon
Corporate Secretary
November 6, 1998
<PAGE> 5
DEVON ENERGY CORPORATION
PROXY STATEMENT
---------------------
NORTHSTAR ENERGY CORPORATION
MANAGEMENT INFORMATION CIRCULAR AND PROXY STATEMENT
---------------------
This Joint Proxy Statement relates to the proposed combination of Devon and
Northstar pursuant to the Combination Agreement. Devon Stockholders and
Northstar Shareholders and Northstar Optionholders are being asked to approve
the Combination and certain other matters, all as more particularly described
herein.
Pursuant to the Combination Agreement, Northstar will become a subsidiary
of Devon, holders of Northstar Common Shares will receive 0.227 Exchangeable
Shares in exchange for each of their Northstar Common Shares, and Northstar
Options will be converted into options to acquire shares of Devon Common Stock
on a 0.227 to 1 basis. The 0.227 to 1 Exchange Ratio, however, may be increased
based on the weighted average trading price of a share of Devon Common Stock
during the Measurement Period up to a maximum of 0.235 to 1. If the Pre-Meeting
Average Price multiplied by 0.227 is less than Cdn. $11.00 per share, the
Exchange Ratio shall be adjusted to the lesser of: (A) 0.235; or (B) the number
obtained by dividing Cdn. $11.00 by the Pre-Meeting Average Price. For the
purposes of this adjustment, the U.S. dollar/Canadian dollar exchange rate for
determining the Pre-Meeting Average Price shall be based upon the average of the
noon buying rate for each of the trading days in the Measurement Period.
Exchangeable Shares will be exchangeable into Devon Common Stock on a
one-for-one basis.
On October 28, 1998, the closing price per share of Devon Common Stock was
$33.6875 or Cdn. $51.80. Assuming that the Pre-Meeting Average Price equals Cdn.
$51.80, the Exchange Ratio would be .227. Based thereon, each Northstar Common
Share would become exchangeable for Exchangeable Shares having a value
equivalent to Cdn. $11.76 (without accounting for fractional shares or the
exercise of dissent rights). The actual value of the consideration to be
received by, and the number of shares to be issued to, holders of Northstar
Common Shares depends on the Pre-Meeting Average Price and, as a result, may
differ from the foregoing example. See "The Combination -- Procedures for
Exchange by Northstar Shareholders and Northstar Optionholders -- Northstar
Shareholders."
The Combination is anticipated to be accounted for as a
pooling-of-interests under U.S. GAAP. See "The Combination -- Anticipated
Accounting Treatment."
This Joint Proxy Statement is being furnished to Devon Stockholders in
connection with the solicitation of proxies by the Devon Board for use at the
Devon Meeting to be held at 10:00 a.m. (local time) on December 9, 1998, at the
Community Room, Bank of Oklahoma, Robinson Avenue at Robert S. Kerr, Oklahoma
City, Oklahoma, and any adjournment or postponement thereof.
This Joint Proxy Statement is also being furnished to Northstar
Shareholders and Northstar Optionholders in connection with the solicitation of
proxies by the management of Northstar for use at the Northstar Meeting to be
held at 10:00 a.m. (local time) on December 10, 1998, at the Alberta Room,
Palliser Hotel, 133-9th Avenue S.W., Calgary, Alberta, and any adjournment or
postponement thereof.
This Joint Proxy Statement and the accompanying forms of proxy are first
being mailed to Devon Stockholders and to Northstar Shareholders and Northstar
Optionholders on or about November 6, 1998.
All information in this Joint Proxy Statement relating to Devon has been
supplied by Devon and all information relating to Northstar has been supplied by
Northstar.
CERTAIN CAPITALIZED TERMS USED IN THIS JOINT PROXY STATEMENT HAVE THE
MEANINGS ASCRIBED THERETO IN THE GLOSSARY OF TERMS BEGINNING ON PAGE 28.
SEE "RISK FACTORS" BEGINNING ON PAGE 35 FOR CERTAIN CONSIDERATIONS RELEVANT
TO APPROVAL OF THE PROPOSALS AND AN INVESTMENT IN THE SECURITIES REFERRED TO
HEREIN.
<PAGE> 6
DISCLOSURE REGARDING FORWARD-LOOKING STATEMENTS
All statements other than statements of historical facts included or
incorporated by reference in this Joint Proxy Statement, including without
limitation statements under "Summary," "Risk Factors," "The
Combination -- Reasons for the Combination," "Devon-Northstar Unaudited Pro
Forma Combined Financial Information," "Unaudited U.S. GAAP Financial
Information -- Northstar," "The Company after the Combination," "Devon
Management's Discussion and Analysis of Financial Condition and Results of
Operations," "Northstar Management's Discussion and Analysis of Financial
Condition and Results of Operations," "Business of Devon," and "Business of
Northstar" regarding the planned capital expenditures, increases in oil and gas
production, the number of anticipated wells to be drilled in 1998 and
thereafter, estimates of increases in production and recoveries of reserves from
secondary recovery operations, estimates as to the limitations on Northstar's
production which may be imposed by the Alberta Energy and Utilities Board,
statements regarding the potential impact of the Year 2000 computer issue,
Devon's pro forma financial information, business strategy and other plans and
objectives for future operations, are forward-looking statements. When used in
this Joint Proxy Statement, the words "estimate," "project," "expect," "intend,"
"anticipate," "believe," or other similar words, or statements that certain
events or conditions "will" or "may" occur, are intended to identify
forward-looking statements. Statements and calculations concerning oil and gas
reserves and their present value also may be deemed to be forward-looking
statements in that they reflect the determination, based on certain estimates
and assumptions, that oil and gas resources may be profitably exploited in the
future. Although the expectations reflected in such forward-looking statements
are believed to be reasonable, no assurance can be given that such expectations
will prove to have been correct. Devon cautions its stockholders and Northstar
cautions its shareholders and optionholders that actual results could differ
materially from those expected by Devon and Northstar, depending on the outcome
of certain factors, including, without limitation: (i) factors discussed under
"Risk Factors" such as fluctuations in the prices of oil and gas, uncertainties
inherent in estimating quantities of oil and gas reserves and projecting future
rates of production and timing of development expenditures, competition,
operating risks, acquisition risks, liquidity and capital requirements, the
effects of governmental and environmental regulation; (ii) adverse changes in
the market for Devon's or Northstar's oil and gas production; and (iii) the
effects of the Year 2000 computer issue. Readers are cautioned not to place
undue reliance on these forward-looking statements, which speak only as of the
date hereof. Neither Devon nor Northstar undertake any obligation to release
publicly the result of any revisions to these forward-looking statements that
may be made to reflect events or circumstances after the date hereof, including,
without limitation, changes in business strategy or planned capital
expenditures, or to reflect the occurrence of unanticipated events.
AVAILABLE INFORMATION
Devon is subject to the informational requirements of the Exchange Act,
and, in accordance therewith, files reports, proxy statements and other
information with the SEC. Such reports, proxy statements and other information
filed by Devon with the SEC can be inspected at the Public Reference Section of
the SEC at Room 1024, Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C.
20549, and the regional offices of the SEC at Northwestern Atrium Center, 500
West Madison Street, Suite 1400, Chicago, Illinois 60661, and Seven World Trade
Center, New York, New York 10048. Copies of such material may be obtained from
the Public Reference Section of the SEC at Room 1024, Judiciary Plaza, 450 Fifth
Street, N.W., Washington, D.C. 20549, at prescribed rates. Devon Common Stock is
listed on the AMEX and reports, proxy statements and other information regarding
Devon can be inspected at the offices of the AMEX, 86 Trinity Place, New York,
New York 10006. The SEC maintains a web site that contains all information filed
electronically with the SEC. The address of the SEC's web site is
http://www.sec.gov. The address of Devon's web site is
http://www.devonenergy.com.
Northstar is subject to the informational requirements of the Canadian
securities commissions and other similar Canadian regulatory authorities, and,
in accordance therewith, files reports, proxy statements and other information
with such authorities. Such reports, proxy statements and other information are
available at web site address http://www.sedar.com.
2
<PAGE> 7
NO PERSON IS AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATION NOT CONTAINED IN THIS JOINT PROXY STATEMENT AND, IF GIVEN OR
MADE, SUCH INFORMATION OR REPRESENTATION SHOULD NOT BE RELIED UPON AS HAVING
BEEN AUTHORIZED. THIS JOINT PROXY STATEMENT DOES NOT CONSTITUTE AN OFFER TO
SELL, OR A SOLICITATION OF AN OFFER TO PURCHASE, ANY SECURITIES, OR THE
SOLICITATION OF A PROXY, BY ANY PERSON IN ANY JURISDICTION IN WHICH SUCH AN
OFFER OR SOLICITATION IS NOT AUTHORIZED OR IN WHICH THE PERSON MAKING SUCH OFFER
OR SOLICITATION IS NOT QUALIFIED TO DO SO OR TO ANY PERSON TO WHOM IT IS
UNLAWFUL TO MAKE SUCH AN OFFER OR SOLICITATION OF AN OFFER OR PROXY
SOLICITATION. NEITHER DELIVERY OF THIS JOINT PROXY STATEMENT NOR ANY
DISTRIBUTION OF THE SECURITIES REFERRED TO IN THIS JOINT PROXY STATEMENT SHALL,
UNDER ANY CIRCUMSTANCES, CREATE AN IMPLICATION THAT THERE HAS BEEN NO CHANGE IN
THE INFORMATION SET FORTH THEREIN SINCE THE DATE OF THIS JOINT PROXY STATEMENT.
DEVON IS A CORPORATION ORGANIZED UNDER THE LAWS OF THE STATE OF OKLAHOMA,
UNITED STATES. ALL BUT ONE OF THE DIRECTORS AND EXECUTIVE OFFICERS OF DEVON
PRIOR TO THE COMBINATION ARE, AND CERTAIN OF SUCH DIRECTORS AND EXECUTIVE
OFFICERS UPON CONSUMMATION OF THE COMBINATION WILL BE, RESIDENTS OF THE UNITED
STATES, AND MANY OF THE EXPERTS NAMED HEREIN ARE RESIDENTS OF THE UNITED STATES.
IN ADDITION, SUBSTANTIAL PORTIONS OF THE ASSETS OF DEVON AND SUCH INDIVIDUALS
AND EXPERTS ARE LOCATED OUTSIDE OF CANADA. AS A RESULT, IT MAY BE DIFFICULT OR
IMPOSSIBLE FOR PERSONS WHO BECOME SECURITYHOLDERS OF DEVON TO EFFECT SERVICE OF
PROCESS UPON SUCH PERSONS WITHIN CANADA WITH RESPECT TO MATTERS ARISING UNDER
CANADIAN SECURITIES LAWS OR TO ENFORCE AGAINST THEM IN CANADIAN COURTS JUDGMENTS
OF SUCH COURTS PREDICATED UPON THE CIVIL LIABILITY PROVISIONS OF CANADIAN
SECURITIES LAWS. NORTHSTAR SHAREHOLDERS AND NORTHSTAR OPTIONHOLDERS SHOULD BE
AWARE THAT THERE IS SOME DOUBT AS TO THE ENFORCEABILITY IN THE UNITED STATES IN
ORIGINAL ACTIONS, OR IN ACTIONS FOR ENFORCEMENT OF JUDGMENTS OF CANADIAN COURTS,
OF CIVIL LIABILITIES PREDICATED UPON THE CANADIAN SECURITIES LAWS. IN ADDITION,
AWARDS OF PUNITIVE DAMAGES IN ACTIONS BROUGHT IN CANADA OR ELSEWHERE MAY BE
UNENFORCEABLE IN THE UNITED STATES.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
UNITED STATES
The following documents heretofore filed by Devon with the SEC are
incorporated by reference herein:
(i) Annual Report on Form 10-K for the year ended December 31, 1997,
filed on March 13, 1998 (a copy of which is included in Annex L to
this Joint Proxy Statement);
(ii) Quarterly Report on Form 10-Q for the quarter ended March 31, 1998,
filed on April 27, 1998;
(iii) Quarterly Report on Form 10-Q for the quarter ended June 30, 1998
filed on August 6, 1998 (a copy of which is included in Annex L to
this Joint Proxy Statement);
(iv) First Amendment to Quarterly Report on Form 10-Q for the quarter
ended June 30, 1998, filed on October 14, 1998 (a copy of which is
included in Annex L to this Joint Proxy Statement);
(v) Current Report on Form 8-K dated January 20, 1998, filed on January
20, 1998;
(vi) Current Report on Form 8-K dated January 26, 1998, filed on January
27, 1998;
(vii) Current Report on Form 8-K dated June 29, 1998, filed on July 8,
1998; and
(viii) Proxy Statement for Devon's 1998 Annual Meeting of Stockholders,
filed on March 30, 1998 (a copy of which is included in Annex L to
this Joint Proxy Statement).
Copies of the foregoing documents, or the information contained therein,
are included in the form of this Joint Proxy Statement filed with the Canadian
securities commissions or other similar Canadian regulatory authorities and
mailed to Northstar Shareholders and Devon Stockholders.
All documents filed by Devon with the SEC pursuant to Sections 13(a),
13(c), 14 or 15(d) of the Exchange Act after the date of this Joint Proxy
Statement and before the date of the Devon Meeting shall be deemed to be
incorporated by reference in this Joint Proxy Statement and to be a part hereof
from the date of filing of such documents. Any statement contained in this Joint
Proxy Statement or in a document incorporated or deemed to be incorporated by
reference in this Joint Proxy Statement shall be deemed to be modified or
superseded for purposes of this Joint Proxy Statement to the extent that a
statement contained in this Joint Proxy Statement or in any other subsequently
filed document that also is or is deemed to be incorporated by reference herein
modifies or supersedes such statement. Any such statement so modified or
superseded shall not be deemed, except as so modified or superseded, to
constitute a part of this Joint Proxy Statement.
3
<PAGE> 8
Devon undertakes to provide without charge to each person to whom a copy of
this Joint Proxy Statement has been delivered, upon the written or oral request
of any such person, a copy of any or all of the documents incorporated by
reference herein and not attached hereto, other than the exhibits to such
documents, unless such exhibits are specifically incorporated by reference into
the information that this Joint Proxy Statement incorporates. Written or oral
requests for such copies should be directed to Devon, to the attention of Marian
J. Moon, Corporate Secretary, Devon Energy Corporation, 20 North Broadway, Suite
1500, Oklahoma City, Oklahoma 73102, telephone number (405) 235-3611. In order
to ensure timely delivery of the documents, any request should be made by
December 1, 1998.
CANADA
The following documents, filed by Northstar with the Canadian securities
commissions or other similar Canadian regulatory authorities in all of the
provinces of Canada, are specifically incorporated by reference in and form an
integral part of this Joint Proxy Statement:
(i) Financial Statements and Management's Discussion and Analysis
contained in the Annual Report for the year ended December 31,
1997;
(ii) Revised Annual Information Form for the year ended December 31,
1997 (a copy of which is included in Annex L to this Joint Proxy
Statement);
(iii) Management Proxy Circular dated March 27, 1998 (a copy of which is
included in Annex L to this Joint Proxy Statement);
(iv) Financial Statements contained in the Quarterly Report for the
quarter ended March 31, 1998;
(v) Financial Statements contained in the Quarterly Report for the
quarter ended June 30, 1998; and
(vi) Material Change Report dated July 9, 1998, with respect to the
Arrangement.
Copies of the foregoing documents, or the information contained therein,
are included in the form of this Joint Proxy Statement filed with the SEC and
mailed to Devon Stockholders and Northstar Shareholders and Northstar
Optionholders. Certain of the Northstar documents listed above include
disclosure of probable reserves as required by Canadian securities legislation.
ANY MATERIAL CHANGE REPORTS (EXCLUDING CONFIDENTIAL REPORTS), INTERIM
FINANCIAL STATEMENTS AND INFORMATION CIRCULARS FILED BY NORTHSTAR WITH THE
CANADIAN SECURITIES COMMISSIONS OR OTHER SIMILAR CANADIAN REGULATORY AUTHORITIES
IN ALL OF THE PROVINCES OF CANADA AFTER THE DATE OF THIS JOINT PROXY STATEMENT
AND PRIOR TO THE NORTHSTAR MEETING SHALL BE DEEMED TO BE INCORPORATED BY
REFERENCE INTO THIS JOINT PROXY STATEMENT.
ANY STATEMENT CONTAINED IN THIS JOINT PROXY STATEMENT OR IN A DOCUMENT
INCORPORATED OR DEEMED TO BE INCORPORATED BY REFERENCE HEREIN SHALL BE DEEMED TO
BE MODIFIED OR SUPERSEDED FOR THE PURPOSES OF THIS JOINT PROXY STATEMENT TO THE
EXTENT THAT A STATEMENT CONTAINED HEREIN OR IN ANY OTHER SUBSEQUENTLY FILED
DOCUMENT WHICH ALSO IS OR IS DEEMED TO BE INCORPORATED BY REFERENCE HEREIN
MODIFIES OR SUPERSEDES SUCH STATEMENT. THE MODIFYING OR SUPERSEDING STATEMENT
NEED NOT STATE THAT IT HAS MODIFIED OR SUPERSEDED A PRIOR STATEMENT OR INCLUDE
ANY OTHER INFORMATION SET FORTH IN THE DOCUMENT THAT IT MODIFIES OR SUPERSEDES.
THE MAKING OF A MODIFYING OR SUPERSEDING STATEMENT SHALL NOT BE DEEMED AN
ADMISSION FOR ANY PURPOSES THAT THE MODIFIED OR SUPERSEDED STATEMENT, WHEN MADE,
CONSTITUTED A MISREPRESENTATION, AN UNTRUE STATEMENT OF A MATERIAL FACT OR AN
OMISSION TO STATE A MATERIAL FACT THAT IS REQUIRED TO BE STATED OR THAT IS
NECESSARY TO MAKE A STATEMENT NOT MISLEADING IN LIGHT OF THE CIRCUMSTANCES IN
WHICH IT WAS MADE. ANY STATEMENT SO MODIFIED OR SUPERSEDED SHALL NOT BE DEEMED
IN ITS UNMODIFIED OR SUPERSEDED FORM TO CONSTITUTE A PART OF THIS JOINT PROXY
STATEMENT.
Northstar undertakes to provide without charge to each person to whom a
copy of this Joint Proxy Statement has been delivered, upon the written or oral
request of any such person, a copy of any or all of the documents incorporated
by reference herein and not attached hereto, other than the exhibits to such
documents, unless such exhibits are specifically incorporated by reference into
the information that this Joint Proxy Statement incorporates. Written or oral
requests for such copies should be directed to Northstar, to the attention of
Murray T. Brown, Corporate Secretary, Northstar Energy Corporation, 3000,
400 -- 3rd Avenue S. W., Calgary, Alberta T2P 4H2, telephone number (403)
213-8000. In order to ensure timely delivery of the documents, any request
should be made by December 1, 1998.
4
<PAGE> 9
LOGO
CORE OPERATING AREAS AFTER THE COMBINATION
Graphic: Two Maps
Map 1 is a small map of the U.S. and Canada that outlines the lower 48 states,
10 provinces and two territories. The states and provinces in which Devon and/or
Northstar have properties are highlighted and named (specifically British
Columbia, Alberta and Saskatchewan in Canada and Montana, North Dakota, Idaho,
Wyoming, South Dakota, Nebraska, Utah, Colorado, Kansas, Arizona, New Mexico,
Oklahoma and Texas in the U.S.).
Map 2 is a larger map of only the highlighted portions of Map 1. This map shows
the outlines of the states and provinces, and also shows the general locations
of Devon's and Northstar's core operating areas. The core areas shown in Canada
are the Northwest, North, East Central, South, West Central and Foothills
regions. The core areas shown in the U.S. are the Rocky Mountain Region, the San
Juan Basin, the Mid-Continent and the Permian Basin.
<PAGE> 10
<TABLE>
<CAPTION>
PROVED RESERVES AS OF DECEMBER 31, 1997(1)
---------------------------------------------------
CORE OPERATING AREAS DEVON NORTHSTAR PRO FORMA(2) MBOE%
-------------------- ------- --------- ------------ -----
<S> <C> <C> <C> <C>
U.S. -- MBOE(3)
Permian Basin............................ 70,700 -- 70,700 23%
San Juan Basin........................... 38,300 -- 38,300 12%
Rocky Mountain Region.................... 34,400 -- 34,400 11%
Mid-Continent............................ 22,700 -- 22,700 7%
Other U.S................................ 1,500 -- 1,500 1%
------- ------- --------- ----
TOTAL U.S.................................. 167,600 -- 167,600 54%
------- ------- --------- ----
CANADA -- MBOE(3)
North Region............................. 5,600 36,800 42,400 14%
Foothills Region......................... n/a 16,800 16,800 5%
Northwest Region......................... 3,300 13,200 16,500 5%
West Central Region...................... 6,700 29,300 36,000 12%
South Region............................. n/a 18,900 18,900 6%
East Central Region...................... 800 13,000 13,800 4%
------- ------- --------- ----
TOTAL CANADA............................... 16,400 128,000 144,400 46%
------- ------- --------- ----
TOTAL U.S. & CANADA........................ 184,000 128,000(4) 312,000(4)(5) 100%
======= ======= ========= ====
OIL -- MBBLS
U.S...................................... 60,900 -- 60,900 19%
Canada................................... 7,500 31,700 39,200 13%
------- ------- --------- ----
Total.................................... 68,400 31,700(4) 100,100(4) 32%
======= ======= ========= ====
GAS -- MMCF
U.S...................................... 567,800 -- 567,800 30%
Canada................................... 48,200 550,100 598,300 32%
------- ------- --------- ----
Total.................................... 616,000 550,100(4) 1,166,100(4) 62%
======= ======= ========= ====
NGLS -- MBBLS
U.S...................................... 12,100 -- 12,100 4%
Canada................................... 800 4,600 5,400 2%
------- ------- --------- ----
Total.................................... 12,900 4,600(4) 17,500(4) 6%
======= ======= ========= ====
TOTAL -- MBOE(3)........................... 184,000 128,000(4) 312,000(4)(5) 100%
======= ======= ========= ====
</TABLE>
- ---------------
(1) Estimates were prepared using year-end 1997 oil and gas prices and SEC
guidelines.
(2) Assuming the combination of Devon and Northstar properties as of December
31, 1997.
(3) Natural gas is converted to oil at the ratio of six Mcf to one Bbl.
(4) Northstar's reserves include quantities owned via Northstar's 50% interest
in Mountain Energy, Inc., a privately-held Canadian oil and gas company. The
quantities included from this 50% equity interest are 3,100 MBbls of oil,
15,600 MMcf of gas and 300 MBbls of NGLs, or 6,000 MBoe of total oil, gas
and NGLs. On July 31, 1998, Northstar acquired the remaining 50% interest of
Mountain Energy, Inc.
(5) From December 31, 1997 to August 31, 1998, the price of West Texas
Intermediate crude oil decreased approximately 33% and the Texas Gulf Coast
gas price decreased approximately 21%. If the total proved reserve estimates
of Devon and Northstar as of year-end 1997 were calculated using August 31,
1998, oil and gas prices and SEC guidelines, the aggregate reserve estimates
would have decreased by approximately 4% from the estimates shown.
<PAGE> 11
SUMMARY
The following is a summary of certain information contained elsewhere in
this Joint Proxy Statement. The information contained in this summary is
qualified in its entirety by and should be read in conjunction with the more
detailed information contained in this Joint Proxy Statement and the documents
incorporated herein by reference. Unless otherwise indicated, capitalized terms
used in this summary are defined in the Glossary of Terms or elsewhere in this
Joint Proxy Statement. IN THIS JOINT PROXY STATEMENT, UNLESS OTHERWISE
INDICATED, ALL DOLLAR AMOUNTS ARE EXPRESSED IN U.S. DOLLARS.
THE COMPANIES
DEVON
Devon is an independent energy company engaged primarily in oil and gas
exploration, development and production, and in the acquisition of producing
properties. Through its predecessors, Devon began operations in 1971 as a
privately-held company. In 1988, Devon Common Stock began trading publicly on
the AMEX under the symbol "DVN". The principal and administrative offices of
Devon are located at 20 North Broadway, Suite 1500, Oklahoma City, Oklahoma
73102-8260 (telephone (405) 235-3611).
NORTHSTAR
Northstar is an independent energy company engaged in oil and gas
exploration, development, production and marketing with properties primarily
located within the Province of Alberta. Northstar was incorporated under the
laws of the Province of Alberta on November 3, 1981 under the name Gane Energy
Corporation and changed its name to Northstar Energy Corporation in June 1986.
The Northstar Common Shares commenced trading on the TSE and the ASE in August
1982, and were listed on the ME in April 1997. The Northstar Common Shares trade
under the symbol "NEN". The head and principal office of Northstar is located at
3000, 400-3rd Avenue S.W., Calgary, Alberta, T2P 4H2 (telephone (403) 213-8000).
THE COMPANY AFTER THE COMBINATION
Upon completion of the Combination, Devon will be an evenly balanced North
American oil and gas producer with 54% of its reserves in the U.S. and 46% in
Canada. The combined company would have had total reserves of approximately 1.2
Tcf of gas and 117 MMBbl of oil and natural gas liquids as of December 31, 1997.
With this Combination, Devon believes it will rank in the top 15 of all
U.S.-based, publicly-held, independent producers in terms of total proved
reserves and, in terms of U.S.-only production, among the top 20 public
independents. In Canada, Devon believes it will rank among the top 20 in Canada-
only oil and gas production.
Immediately following the Combination, Devon will have approximately $325
million in long-term debt. Consequently, it expects to have substantial unused
borrowing capacity. Devon also expects to have more financial flexibility to
take advantage of opportunities for mergers, acquisitions, exploration or other
growth opportunities than either Devon or Northstar would have separately.
The combined company will have the management teams of both Devon and
Northstar. J. Larry Nichols, current President and CEO of Devon, will continue
to serve as President and CEO of Devon. Mr. Nichols and the remainder of Devon's
executive staff will continue in their present capacities as the senior
executive staff of Devon. John A. Hagg, current President and CEO of Northstar,
and its executive staff will lead the Canadian operations.
Devon's primary objectives will continue to be to build reserves,
production, cash flow and earnings per share by: (i) acquiring oil and gas
properties; (ii) exploring for new oil and gas reserves; and (iii) optimizing
production from existing oil and gas properties. Management seeks to achieve
these objectives by: (i) keeping debt levels low; (ii) concentrating properties
in core areas to achieve economies of scale; (iii) acquiring and developing high
profit margin properties; (iv) continually disposing of marginal and
non-strategic properties;
5
<PAGE> 12
and (v) balancing reserves between oil and gas. However, Devon's ability to
achieve these objectives may be impaired by a number of factors including a lack
of availability of quality properties for sale at reasonable prices, poor
drilling success and reduced demand for oil and gas. See "Risk Factors" for a
more detailed discussion of these and other risks.
THE MEETINGS
DATE, TIME AND PLACE
Devon. The Devon Meeting will be held on December 9, 1998 at 10:00 a.m.
(local time) at the Community Room, Bank of Oklahoma, Robinson Avenue at Robert
S. Kerr, Oklahoma City, Oklahoma.
Northstar. The Northstar Meeting will be held on December 10, 1998, at
10:00 a.m. (local time) at the Alberta Room, Palliser Hotel, 133-9th Avenue
S.W., Calgary, Alberta.
PURPOSES OF THE MEETINGS
Devon. The purpose of the Devon Meeting is to consider and act upon: (i) a
proposal to approve the Combination Agreement and the Combination; (ii) a
proposal to approve and adopt the Certificate Amendment; (iii) a proposal to
approve and adopt the Option Plan Amendment; and (iv) such other business as may
be properly presented to the meeting.
Northstar. The purpose of the Northstar Meeting is to consider and act
upon: (i) a special resolution approving the Arrangement Resolution; and (ii)
such other business as may be properly presented to the meeting.
RECORD DATES; HOLDERS ENTITLED TO VOTE
Devon. Only holders of record on the Devon Record Date are entitled to
notice of and to vote at the Devon Meeting. On such date, there were 32,319,894
shares of Devon Common Stock outstanding, each of which is entitled to one vote
on each matter to be acted upon at the Devon Meeting.
Northstar. Only holders of record of Northstar Common Shares and Northstar
Options on the Northstar Record Date are entitled to notice of and to vote at
the Northstar Meeting, provided that to the extent a person has transferred any
Northstar Common Shares after such record date and the transferee of such shares
establishes that such transferee owns such shares and demands not later than ten
days before the Northstar Meeting to be included in the list of Northstar
Shareholders eligible to vote at the Northstar Meeting, such transferee will be
entitled to vote such shares at the Northstar Meeting. On such date, there were
outstanding 68,486,352 Northstar Common Shares, each of which is entitled to one
vote on each matter to be acted upon at the Northstar Meeting. On such date,
there were outstanding Northstar Options with respect to 5,520,345 Northstar
Common Shares. Each Northstar Option is entitled to one vote at the Northstar
Meeting with respect to each Northstar Common Share subject thereto.
QUORUM; VOTE REQUIRED
Devon. The presence, in person or by proxy, at the Devon Meeting of the
holders of a majority of the shares of Devon Common Stock outstanding and
entitled to vote at the Devon Meeting is necessary to constitute a quorum.
Approval and adoption of the Combination Agreement and the Combination and the
Option Plan Amendment requires the affirmative vote of a majority of votes cast
on the proposals. Approval and adoption of the Certificate Amendment requires
the affirmative vote of the holders of a majority of the shares of Devon Common
Stock outstanding and entitled to vote at the meeting.
Devon Stockholders (including all of Devon's directors and officers) owning
34% of the outstanding shares of Devon Common Stock as of October 27, 1998 have
agreed to vote in favor of the approval of the Combination Agreement and the
Combination and the Certificate Amendment. See "The Combination -- Other
Agreements -- Stockholder Agreements." In addition, as of October 27, 1998,
Devon Stockholders
6
<PAGE> 13
(including all of Devon's directors and officers) owning 34% of the outstanding
shares of Devon Common Stock have indicated that they intend to vote in favor of
the Option Plan Amendment.
Northstar. The quorum at the Northstar Meeting will be four persons present
in person or representing by proxy issued shares of Northstar representing not
less than 5% of the votes entitled to be cast at such meeting. Pursuant to the
Interim Order, the vote required to approve the Arrangement Resolution is not
less than 66 2/3% of the aggregate votes actually cast by the Northstar
Shareholders and the Northstar Optionholders, voting together (not counting for
this purpose abstentions, spoiled votes, illegible votes and/or defective
votes). For these purposes, each Northstar Common Share carries one vote, and
each Northstar Option carries the number of votes equal to the number of
Northstar Common Shares subject to the Northstar Option.
The Chairman of the Board and the President and Chief Executive Officer of
Northstar, who collectively owned 2.5% of the outstanding Northstar Common
Shares and 17% of the outstanding Northstar Options on October 27, 1998, have
agreed to vote all voting securities of Northstar over which they have voting
authority in favor of the Arrangement Resolution. In addition, as of October 27,
1998, certain other directors and executive officers of Northstar owned 2.0% of
the outstanding Northstar Common Shares and 28% of the outstanding Northstar
Options, all of whom have indicated that they intend to vote in favor of the
Arrangement Resolution.
RECOMMENDATIONS OF BOARDS OF DIRECTORS
Devon. THE DEVON BOARD BELIEVES THAT THE COMBINATION IS IN THE BEST
INTERESTS OF DEVON STOCKHOLDERS AND UNANIMOUSLY RECOMMENDS THAT THE DEVON
STOCKHOLDERS VOTE TO: (I) APPROVE THE COMBINATION AGREEMENT AND THE COMBINATION;
(II) APPROVE AND ADOPT THE CERTIFICATE AMENDMENT; AND (III) APPROVE AND ADOPT
THE OPTION PLAN AMENDMENT. SEE "THE COMBINATION -- REASONS FOR THE COMBINATION."
Northstar. THE NORTHSTAR BOARD BELIEVES THAT THE COMBINATION IS IN THE BEST
INTERESTS OF NORTHSTAR AND THE NORTHSTAR SHAREHOLDERS AND NORTHSTAR
OPTIONHOLDERS AND UNANIMOUSLY RECOMMENDS THAT THE NORTHSTAR SHAREHOLDERS AND
NORTHSTAR OPTIONHOLDERS VOTE IN FAVOR OF THE ARRANGEMENT RESOLUTION. SEE "THE
COMBINATION -- REASONS FOR THE COMBINATION."
OPINIONS OF FINANCIAL ADVISORS
Merrill Lynch has delivered the Merrill Lynch Opinion to the Devon Board
that, as of June 29, 1998, and based on and subject to the factors and
assumptions set forth therein, the Exchange Ratio was fair, from a financial
point of view, to Devon. The Merrill Lynch Opinion was provided to the Devon
Board for its information and is directed only to the fairness, from a financial
point of view, of the Exchange Ratio to Devon, does not address the merits of
the underlying decision by Devon to engage in the Combination and does not
constitute a recommendation to any Devon Stockholder as to how such stockholder
should vote on the Combination Agreement and the Combination, the Certificate
Amendment or the Option Plan Amendment. The full text of the Merrill Lynch
Opinion, which sets forth assumptions made, matters considered, qualifications
and limitations on the review undertaken by Merrill Lynch, is attached hereto as
Annex H. Devon Stockholders are urged to read the Merrill Lynch Opinion in its
entirety.
Morgan Stanley has acted as financial advisor to Northstar in connection
with the Combination. On June 29, 1998, Morgan Stanley delivered its written
opinion to the Northstar Board that, as of such date and based upon and subject
to the matters set forth therein, the Consideration (as defined under the
heading "Opinions of Financial Advisors -- Opinion of Morgan Stanley") to be
received pursuant to the Combination Agreement in the aggregate was fair, from a
financial point of view, to the holders of Northstar Common Shares and Northstar
Options. The Morgan Stanley Opinion was provided to the Northstar Board for its
information and is directed only to the fairness, from a financial point of
view, of the Consideration to be received in the aggregate pursuant to the
Combination Agreement by the holders of Northstar Common Shares and Northstar
Options, does not address the merits of the underlying decision by Northstar to
engage
7
<PAGE> 14
in the Combination, and does not constitute a recommendation to any holder of
Northstar Common Shares or Northstar Options as to how such Northstar
Shareholder or Northstar Optionholder should vote on the Combination Agreement
or the Arrangement. The full text of the Morgan Stanley Opinion, which sets
forth the procedures followed, assumptions made, matters considered and
limitations on the review undertaken, is attached as Annex I to this Joint Proxy
Statement. Holders of Northstar Common Shares and Northstar Options are urged to
read the Morgan Stanley Opinion in its entirety.
RBC DS has also acted as financial advisor to Northstar in connection with
the Combination. RBC DS delivered the RBC DS Opinion that, as of June 29, 1998,
and based upon and subject to the matters set forth therein, the Arrangement was
fair, from a financial point of view, to the Northstar Shareholders and
Northstar Optionholders. The RBC DS Opinion was provided to the Northstar Board
for its information and is directed only to the fairness, from a financial point
of view, of the Plan of Arrangement to the Northstar Shareholders and Northstar
Optionholders and does not constitute a recommendation to any Northstar
Shareholder or Northstar Optionholder as to how such shareholder or optionholder
should vote on the Arrangement. The full text of the RBC DS Opinion, which sets
forth the procedures followed, assumptions made, matters considered,
qualifications and limitations on the review undertaken, is attached as Annex J
to this Joint Proxy Statement. Northstar Shareholders and Northstar
Optionholders are urged to read the RBC DS Opinion in its entirety.
See "The Combination -- Opinions of Financial Advisors."
THE COMBINATION
EXCHANGE OF NORTHSTAR COMMON SHARES AND RELATED MATTERS
Under the terms of the Arrangement, on the Effective Date, each Northstar
Common Share will be exchanged for the number of Exchangeable Shares determined
by the application of the Exchange Ratio. A Northstar Shareholder receiving
Exchangeable Shares can, at the election of the holder in the Northstar Letter
of Transmittal, exercise the Exchange Put Right immediately and receive from
Devon shares of Devon Common Stock upon consummation of the Combination.
Thereafter, Exchangeable Shares will be exchangeable at any time into shares of
Devon Common Stock on a one-for-one basis, through the exercise by the holder of
the Exchange Put Right or, subject to exercise of the Retraction Call Right, the
holder's retraction right. In order to obtain certificates for the shares
issuable on an exchange, the holder will be required to deliver to the Trustee
or Northstar, as applicable, the certificates for shares originally held, duly
executed transfer documentation and the form of the required notice for the
particular exchange action, all as required in the Exchangeable Share
Provisions.
At the Effective Time, pursuant to the Combination Agreement, Devon will
assume the obligations of Northstar under the Northstar Option Plan and the
Northstar Options. Each Northstar Option will be converted into an option to
purchase that number of shares of Devon Common Stock determined by multiplying
the number of Northstar Common Shares subject to such Northstar Option at the
Effective Time by the Exchange Ratio, rounded down to the nearest whole number
of shares, at an exercise price per share of Devon Common Stock equal to the
exercise price per share of such Northstar Option immediately prior to the
Effective Time (converted into U.S. dollars) divided by the Exchange Ratio. The
terms and conditions of the Northstar Options will otherwise be unchanged.
Based on a calculation of the Exchange Ratio as 0.227 Exchangeable Shares
for each Northstar Common Share, Devon will ultimately be required to issue
approximately 15,540,000 shares of Devon Common Stock in exchange for all
Exchangeable Shares potentially resulting from the Arrangement, and
approximately 1,270,000 additional shares of Devon Common Stock assuming the
exercise of currently outstanding Northstar Options. If the maximum Exchange
Ratio of 0.235 is used, Devon will ultimately be required to issue an additional
550,000 shares, or a total of approximately 16,090,000 shares of Devon Common
Stock in exchange for all Exchangeable Shares and an additional 45,000 shares,
or a total of approximately 1,315,000 additional shares of Devon Common Stock
assuming the exercise of currently outstanding Northstar Options. Devon will
issue a press release announcing the exact Exchange Ratio on the day after the
Measurement
8
<PAGE> 15
Period, currently anticipated to be December 8, 1998, and post such Exchange
Ratio to its web site on the same day. The address of Devon's web site is
http://www.devonenergy.com.
If the market price of Devon Common Stock remains at its recent range, the
Exchange Ratio will be 0.227:1. Based on that Exchange Ratio and assuming all
Exchangeable Shares are subsequently exchanged for Devon Common Stock, the
former holders of Northstar Common Shares would hold approximately 32% of the
shares of Devon Common Stock outstanding after such exchange.
The following chart illustrates the Exchange Ratios resulting from various
assumed average trading prices of Devon Common Stock during the Measurement
Period. There can be no assurance that Devon Common Stock will trade at any of
the assumed prices. See "The Combination -- Combination Mechanics and
Description of Exchangeable Shares" and "The Combination -- Procedures For
Exchange by Northstar Shareholders and Northstar Optionholders."
<TABLE>
<CAPTION>
WEIGHTED AVERAGE TRADING ASSUMED NUMBER OF NORTHSTAR CANADIAN DOLLAR
PRICE OF DEVON COMMON U.S. DOLLAR/ PRE-MEETING EXCHANGEABLE SHARES EQUIVALENT VALUE
STOCK DURING MEASUREMENT CANADIAN DOLLAR AVERAGE PRICE APPLICABLE ISSUED PER 100 OF A NORTHSTAR
PERIOD (U.S.$) EXCHANGE RATE (C$) EXCHANGE RATIO NORTHSTAR COMMON SHARE EXCHANGEABLE SHARE
- ------------------------ --------------- ------------- -------------- ---------------------- ------------------
<S> <C> <C> <C> <C> <C>
26.00 1.5230 39.5980 0.2350 23 9.3055
27.00 1.5230 41.1210 0.2350 23 9.6634
28.00 1.5230 42.6440 0.2350 23 10.0213
29.00 1.5230 44.1670 0.2350 23 10.3792
30.00 1.5230 45.6900 0.2350 23 10.7372
31.00 1.5230 47.2130 0.2330 23 11.0000
31.25 1.5230 47.5938 0.2311 23 11.0000
31.50 1.5230 47.9745 0.2293 22 11.0000
31.75 1.5230 48.3553 0.2275 22 11.0000
32.00 1.5230 48.7360 0.2270 22 11.0631
33.00 1.5230 50.2590 0.2270 22 11.4088
34.00 1.5230 51.7820 0.2270 22 11.7545
35.00 1.5230 53.3050 0.2270 22 12.1002
</TABLE>
VOTING, DIVIDEND AND LIQUIDATION RIGHTS OF EXCHANGEABLE SHARES
Under the laws of the Province of Alberta and relevant federal Canadian
law, the Exchangeable Shares will be considered shares of Northstar.
Nevertheless, through the combination of the Exchangeable Share Provisions, the
Support Agreement and the Voting and Exchange Trust Agreement, the Exchangeable
Shares are structured to be the economic equivalent of Devon Common Stock, and
the holders of Exchangeable Shares will have the following principal and
material rights:
(i) the right to exchange such shares for shares of Devon Common Stock
on a one-for-one basis (with an adjustment for the Dividend Amount, if
any);
(ii) the right to receive dividends, on a per share equivalent basis,
in amounts (or property in the case of non-cash dividends) which are the
same, and which are payable at the same time, as dividends declared on
Devon Common Stock;
(iii) the right to vote, on a per share equivalent basis, at all
stockholder meetings at which holders of shares of Devon Common Stock are
entitled to vote; and
(iv) the right to participate upon a Devon Liquidation Event, on a pro
rata basis with the holders of Devon Common Stock, in the distribution of
assets of Devon, through the mandatory exchange of Exchangeable Shares for
shares of Devon Common Stock.
The Exchangeable Shares will, in effect, have no separate economic rights
against or in Northstar and will have no separate voting rights in Northstar
(other than certain limited class rights required under the ABCA and the right
to vote on any change in the fundamental terms of the shares themselves or the
related
9
<PAGE> 16
terms in the Support Agreement and Voting and Exchange Trust Agreement, in which
cases, the Exchangeable Shares are subject to automatic redemption upon the
occurrence of an Automatic Redemption Date). Northstar Shareholders will
generally only be able to obtain any deferral of recognition of gain or loss on
their Exchangeable Shares for Canadian federal income tax and U.S. federal
income tax purposes for as long as they hold Exchangeable Shares. An automatic
redemption of the Exchangeable Shares may occur at any time after the Effective
Date upon the occurrence of certain events that cause an Automatic Redemption
Date and will occur no later than the tenth anniversary of the Effective Date.
See "Northstar Share Capital" and "Income Tax Considerations to Northstar
Shareholders and Optionholders."
EFFECTIVE TIME OF THE COMBINATION
It is anticipated that the Combination will become effective after the
requisite shareholder and optionholder, Court and regulatory approvals have been
obtained and are final and all other conditions to the Combination have been
satisfied or waived. It is presently anticipated that the Combination will
become effective within two or three days of the requisite shareholder and
optionholder approvals on or about December 10, 1998.
STOCK EXCHANGE LISTINGS
The TSE has conditionally approved the listing and posting for trading of
the Exchangeable Shares on the Effective Date, subject to compliance with its
usual requirements. The AMEX has conditionally approved, subject to Devon
Stockholder approval, the listing on a when issued basis of the shares of Devon
Common Stock to be issued from time to time in exchange for Exchangeable Shares
and upon future exercise of the Northstar Options.
CONDITIONS TO THE COMBINATION
The obligations of Devon and Northstar to consummate the Combination are
subject to the satisfaction of certain conditions, including obtaining requisite
shareholder and optionholder, Court and regulatory approvals. See "The
Combination -- The Combination Agreement."
REGULATORY REQUIREMENTS
Devon has completed all filings under the Investment Canada Act, the
Canadian statute of general application regulating non-domestic investment in
Canada and has received the necessary approval required to proceed with the
Arrangement. The Combination also constitutes a notifiable transaction pursuant
to the Competition Act and requires the approval of the Alberta Energy and
Utilities Board. Devon and Northstar are not aware of any other government or
regulatory approvals required for consummation of the Combination, other than
satisfaction of all of the TSE requirements relating to the listing of the
Exchangeable Shares, compliance with applicable securities laws of various
jurisdictions and the rulings or orders obtained from certain provincial
securities regulatory authorities in Canada. See "The Combination -- Regulatory
Matters."
ANTICIPATED ACCOUNTING TREATMENT
The Combination is anticipated to be accounted for as a
pooling-of-interests under U.S. GAAP. See "The Combination -- Anticipated
Accounting Treatment."
CERTAIN RELATED AGREEMENTS
Devon Affiliates. Devon and Northstar have entered into the Devon
Affiliates' Agreements with each of the Devon Affiliates, pursuant to which such
persons have agreed that they will not sell, transfer, encumber or otherwise
dispose of any Devon Common Stock during the period beginning on the date of the
Combination Agreement and ending on the date Devon shall have publicly released
financial results for a period that includes at least 30 days of combined
operating results of Devon and Northstar. See "The Combination -- Other
Agreements -- Affiliates' Agreements."
10
<PAGE> 17
Northstar Affiliates. Devon and Northstar have also entered into the
Northstar Affiliates' Agreements with each of the Northstar Affiliates, pursuant
to which such persons have agreed that they will not sell, transfer, encumber or
otherwise dispose of any Northstar Common Shares from the date of execution of
the Combination Agreement until the 45th day preceding the Effective Date except
for valid business purposes, and, subject to certain exceptions, in the 45 day
period preceding the Effective Date, and that they will not sell, transfer or
encumber or otherwise dispose of any Exchangeable Shares or shares of Devon
Common Stock after the Effective Date until Devon shall have publicly released
financial results for a period that includes at least 30 days of combined
operating results of Devon and Northstar.
In addition, the Northstar Affiliates have agreed that they will not sell,
pledge or otherwise dispose of any Exchangeable Shares or shares of Devon Common
Stock unless: (i) such transaction is permitted pursuant to the provisions of
Rule 145(d) under the Securities Act; (ii) such shares are disposed of in a
transaction that complies with Rule 903 or Rule 904 of Regulation S under the
Securities Act or is otherwise exempt from the registration requirements of the
Securities Act; or (iii) such shares are disposed of pursuant to an effective
registration statement under the Securities Act. See "The Combination -- Other
Agreements -- Affiliates' Agreements."
DISSENT AND APPRAISAL RIGHTS
Pursuant to the Interim Order, Northstar Shareholders and Northstar
Optionholders have certain rights to dissent and receive fair value for the
Northstar Common Shares or Northstar Options they own in accordance with section
184 of the ABCA, as modified by the Interim Order. The obligations of Devon and
Northstar to consummate the Combination are conditioned upon, among other
things, Northstar not having received prior to the Effective Time notice from
the holders of more than 10% of the issued and outstanding Northstar Common
Shares and Northstar Options of their intention to exercise any rights of
dissent. See "Dissenting Northstar Shareholders' and Northstar Optionholders'
Rights."
INTERESTS OF CERTAIN PERSONS
On the Effective Date, John A. Hagg and Michael M. Kanovsky, both current
members of the Northstar Board, will be appointed to the Devon Board. Also on
the Effective Date, the Northstar Board will be reduced in size from nine to
seven members. Four current Northstar Board members, Mr. Hagg, Mr. Kanovsky,
John W. Burrows and Donald A. Seaman, will remain on the board and three new
members will be added. The new members will be John Richels, currently Executive
Vice President and Chief Financial Officer of Northstar, J. Larry Nichols,
Devon's President, Chief Executive Officer and a director, and H. Allen Turner,
Devon's Vice President -- Corporate Development. The remaining five current
Northstar directors will resign.
Pursuant to the Combination Agreement, Devon has agreed to maintain all
rights to indemnification existing at the time of execution of the Combination
Agreement in favor of the directors and officers of Northstar and its
Subsidiaries in accordance with the charter documents and bylaws of each entity
and to the fullest extent permitted under the ABCA and to continue in effect
director and officer liability insurance for such persons for six years after
the Effective Date. See "The Combination -- Interests of Certain Persons in the
Combination."
In addition, on the Effective Date, Devon will assume the obligations of
Northstar under the Northstar Option Plan and each Northstar Option. Each
Northstar Option will be modified to become an option to purchase shares of
Devon Common Stock. See "The Combination -- Combination Mechanics and
Description of Exchangeable Shares -- Northstar Options."
Each of the executive officers of Northstar, other than John A. Hagg, is
entitled upon the Arrangement becoming effective, for a period of six months
from the Effective Date, to terminate their employment with Northstar and to
require Northstar to make a lump sum payment equal to one times (in two cases)
or three quarters times (in four cases) such executive officer's base salary and
all other remuneration pursuant to any profit sharing, incentive or bonus
program which the executive officer was entitled to receive or did receive
during the prior 12 month period ended on the Effective Date. See "The
Combination -- Interests of Certain Persons in the Combination."
11
<PAGE> 18
CERTAIN INCOME TAX CONSIDERATIONS
The Combination has been structured to provide the opportunity for a tax
deferral to most Canadian resident Northstar Shareholders who exchange their
Northstar Common Shares for Exchangeable Shares pursuant to the Arrangement. In
addition, it is more likely than not that most United States Holders (as defined
under "Income Tax Considerations to Northstar Shareholders and
Optionholders -- United States Federal Income Tax Considerations to Northstar
Shareholders") of Northstar Common Shares who exchange their Northstar Common
Shares for Exchangeable Shares pursuant to the Arrangement will have the
opportunity for a tax deferral. However, Northstar Shareholders will generally
only be able to obtain tax deferral for as long as they hold the Exchangeable
Shares, and will, except in certain limited situations, recognize a gain or loss
upon the exchange of their Exchangeable Shares for shares of Devon Common Stock.
There are other conditions and limitations on qualifying for the tax deferral.
IN ADDITION, A REDEMPTION OF THE EXCHANGEABLE SHARES MAY OCCUR AT ANY TIME
AFTER THE EFFECTIVE DATE IF AN AUTOMATIC REDEMPTION DATE OCCURS. AN AUTOMATIC
REDEMPTION DATE WILL OCCUR NO LATER THAN THE TENTH ANNIVERSARY OF THE EFFECTIVE
DATE. BECAUSE OF THE POTENTIALLY ADVERSE TAX CONSEQUENCES OF THE RECEIPT OF A
DEEMED DIVIDEND UPON THE REDEMPTION (INCLUDING PURSUANT TO A RETRACTION) OF AN
EXCHANGEABLE SHARE BY NORTHSTAR, HOLDERS OF EXCHANGEABLE SHARES SHOULD CONSULT
WITH THEIR OWN TAX ADVISORS CONCERNING THE POSSIBLE BENEFITS IN THEIR PARTICULAR
CIRCUMSTANCES OF EXCHANGING EXCHANGEABLE SHARES FOR SHARES OF DEVON COMMON STOCK
OR OTHERWISE DISPOSING OF THEIR EXCHANGEABLE SHARES. SEE "NORTHSTAR SHARE
CAPITAL."
NORTHSTAR SHAREHOLDERS AND NORTHSTAR OPTIONHOLDERS ARE URGED TO CONSULT
THEIR OWN TAX ADVISORS. See "Income Tax Considerations to Northstar Shareholders
and Optionholders."
RISK FACTORS
For a discussion of certain risk factors with respect to the business and
operations of Devon and Northstar that should be considered by a Devon
Stockholder, Northstar Shareholder or Northstar Optionholder in evaluating
whether to approve the Combination, see "Risk Factors."
COMPARATIVE MARKET PRICE DATA
On June 26, 1998, the last full trading day prior to the joint public
announcement by Devon and Northstar of the proposed Combination, the last
reported sales price on the AMEX of Devon Common Stock was $36.50. The last
reported sales price of the Northstar Common Shares on the TSE on the same day
was Cdn. $9.75. On October 28, 1998, the last reported sales price on the AMEX
of Devon Common Stock was $33.6875 and the last reported sales price of the
Northstar Common Shares on the TSE was Cdn. $11.40. See "Comparative Market
Price Data."
DIVIDEND POLICIES
Historically, Northstar has not paid dividends on the Northstar Common
Shares and has no present plans to pay dividends on such shares.
Devon commenced the payment of regular dividends on shares of Devon Common
Stock in 1993. Since December 31, 1996, quarterly dividends have been $0.05 per
share. Devon anticipates it will continue to pay regular quarterly dividends on
shares of Devon Common Stock and, therefore, on the Exchangeable Shares.
12
<PAGE> 19
SUMMARY UNAUDITED PRO FORMA COMBINED FINANCIAL AND PRODUCTION INFORMATION
The following tables set forth certain unaudited pro forma combined
financial and production information with respect to the Combination. Such
information gives effect to the Combination under the pooling-of-interests
method of accounting under U.S. GAAP. Accordingly, the unaudited pro forma
combined balance sheet has been prepared as if Devon and Northstar were combined
at the balance sheet date. The unaudited pro forma combined statements of
operations have been prepared as if Devon and Northstar were combined as of the
beginning of the earliest period presented. The following unaudited pro forma
combined information is derived from the unaudited pro forma combined financial
statements appearing elsewhere herein and should be read in conjunction with
those statements. The unaudited pro forma combined information is presented for
illustrative purposes only and is not necessarily indicative of actual results
of operations or financial position that would have been achieved had the
Combination been consummated at the beginning of the earliest period presented.
The unaudited pro forma combined information is also not necessarily indicative
of future results.
<TABLE>
<CAPTION>
AS OF JUNE 30, 1998
--------------------------------------
DEVON-
NORTHSTAR
DEVON NORTHSTAR PRO FORMA
HISTORICAL U.S. GAAP(1) COMBINED
---------- ------------ ----------
(THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C>
BALANCE SHEET DATA:
Total assets........................................... $863,157 $432,372 $1,226,709
Long-term debt......................................... -- 302,078 302,078
Convertible preferred securities of subsidiary trust... 149,500 -- 149,500
Stockholders' equity................................... 556,551 61,296 604,847
Book value per share................................... 17.22 0.90 12.65
</TABLE>
13
<PAGE> 20
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30, 1998
-------------------------------------
DEVON-
NORTHSTAR
DEVON NORTHSTAR PRO FORMA
HISTORICAL U.S. GAAP(1) COMBINED
---------- ------------ ---------
(THOUSANDS, EXCEPT PER SHARE DATA,
PER UNIT DATA AND RATIOS)
<S> <C> <C> <C>
OPERATIONS DATA:
OPERATING RESULTS
Oil sales............................................ $ 45,564 $ 30,009 $ 75,573
Gas sales............................................ 70,279 36,276 106,555
NGLs sales........................................... 7,988 1,699 9,687
Other revenue(2)..................................... 3,603 9,794 13,397
-------- -------- --------
Total revenue................................... 127,434 77,778 205,212
-------- -------- --------
Lease operating expenses............................. 37,112 20,567 57,679
Production taxes..................................... 6,539 727 7,266
Depreciation, depletion and amortization............. 45,024 16,134 61,158
General and administrative expenses.................. 6,740 5,044 11,784
Interest expense..................................... 51 10,786 10,837
Deferred effect of changes in foreign currency
exchange rate on long-term debt.................... -- 6,921 6,921
Distributions on preferred securities of subsidiary
trust.............................................. 4,859 -- 4,859
-------- -------- --------
Total costs and expenses........................ 100,325 60,179 160,504
-------- -------- --------
Earnings before income taxes......................... 27,109 17,599 44,708
Income tax expense:
Current............................................ 4,636 695 5,331
Deferred........................................... 4,717 8,262 12,979
-------- -------- --------
Total income tax expense........................ 9,353 8,957 18,310
-------- -------- --------
Net earnings......................................... $ 17,756 $ 8,642 $ 26,398
======== ======== ========
Net earnings per share:
Basic.............................................. 0.55 0.55
Diluted............................................ 0.55 0.55
Cash dividends per share............................. 0.10 0.07
Weighted average common shares
outstanding -- basic............................... 32,320 47,794
Ratio of earnings to fixed charges(3)................ 6.19 2.94
CASH FLOW DATA
Net cash provided by operating activities............ $ 67,618 $ 28,732 $ 96,350
Net cash provided (used) by investing activities..... (88,746) 20,131 (68,615)
Net cash provided (used) by financing activities..... 2,370 (48,863) (46,493)
Modified EBITDA(4)(6)................................ 77,042 51,441 128,483
Cash margin(5)(6).................................... 67,497 39,959 107,456
PRODUCTION, PRICE AND OTHER DATA
Production:
Oil (MBbls)........................................ 3,397 2,708 6,105
Gas (MMcf)......................................... 36,618 30,044 66,662
NGLs (MBbls)....................................... 802 241 1,043
MBoe(7)............................................ 10,303 7,956 18,259
Average prices:
Oil (per Bbl)...................................... $ 13.41 $ 11.08 $ 12.38
Gas (per Mcf)...................................... 1.92 1.21 1.60
NGLs (per Bbl)..................................... 9.95 7.05 9.29
Per Boe(7)......................................... 12.02 8.55 10.51
Costs per Boe(7):
Operating costs.................................... 4.24 2.68 3.56
Depreciation, depletion and amortization of oil and
gas properties.................................. 4.23 1.95 3.24
General and administrative expenses................ 0.65 0.63 0.65
</TABLE>
14
<PAGE> 21
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30, 1997
-------------------------------------
DEVON-
NORTHSTAR
DEVON NORTHSTAR PRO FORMA
HISTORICAL U.S. GAAP(1) COMBINED
---------- ------------ ---------
(THOUSANDS, EXCEPT PER SHARE DATA,
PER UNIT DATA AND RATIOS)
<S> <C> <C> <C>
OPERATIONS DATA:
OPERATING RESULTS
Oil sales........................................... $ 69,590 $ 28,290 $ 97,880
Gas sales........................................... 73,414 24,891 98,305
NGLs sales.......................................... 11,328 2,136 13,464
Other revenue(2).................................... 3,219 34,128 37,347
-------- --------- ---------
Total revenue.................................. 157,551 89,445 246,996
-------- --------- ---------
Lease operating expenses............................ 30,341 15,588 45,929
Production taxes.................................... 9,055 573 9,628
Depreciation, depletion and amortization............ 40,142 29,479 69,621
General and administrative expenses................. 6,236 5,544 11,780
Interest expense.................................... 159 5,488 5,647
Deferred effect of changes in foreign currency
exchange rate on long-term debt................... -- 266 266
Distributions on preferred securities of subsidiary
trust............................................. 4,859 -- 4,859
-------- --------- ---------
Total costs and expenses....................... 90,792 56,938 147,730
-------- --------- ---------
Earnings before income taxes........................ 66,759 32,507 99,266
Income tax expense:
Current........................................... 8,545 781 9,326
Deferred.......................................... 18,158 14,526 32,684
-------- --------- ---------
Total income tax expense....................... 26,703 15,307 42,010
-------- --------- ---------
Net earnings........................................ $ 40,056 $ 17,200 $ 57,256
======== ========= =========
Net earnings per share:
Basic............................................. 1.25 1.20
Diluted........................................... 1.15 1.13
Cash dividends per share............................ 0.10 0.07
Weighted average common shares
outstanding -- basic.............................. 32,154 47,763
Ratio of earnings to fixed charges(3)............... 13.67 9.94
CASH FLOW DATA
Net cash provided by operating activities........... $ 93,753 $ 21,738 $ 115,491
Net cash provided (used) by investing activities.... (50,588) 107,071 56,483
Net cash used by financing activities............... (9,688) (149,790) (159,478)
Modified EBITDA(4)(6)............................... 111,919 67,740 179,659
Cash margin(5)(6)................................... 98,356 61,471 159,827
PRODUCTION, PRICE AND OTHER DATA
Production:
Oil (MBbls)....................................... 3,493 1,873 5,366
Gas (MMcf)........................................ 34,332 19,350 53,682
NGLs (MBbls)...................................... 800 122 922
MBoe(7)........................................... 10,016 5,220 15,236
Average prices:
Oil (per Bbl)..................................... $ 19.92 $ 15.10 $ 18.24
Gas (per Mcf)..................................... 2.14 1.29 1.83
NGLs (per Bbl).................................... 14.15 17.51 14.60
Per Boe(7)........................................ 15.41 10.60 13.76
Costs per Boe(7):
Operating costs................................... 3.93 3.10 3.65
Depreciation, depletion and amortization of oil
and gas properties............................. 3.87 5.54 4.44
General and administrative expenses............... 0.62 1.06 0.77
</TABLE>
15
<PAGE> 22
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1997
---------------------------------------
DEVON-
NORTHSTAR
DEVON NORTHSTAR PRO FORMA
HISTORICAL U.S. GAAP(1) COMBINED
---------- ------------ ---------
(THOUSANDS, EXCEPT PER SHARE DATA,
PER UNIT DATA AND RATIOS)
<S> <C> <C> <C>
OPERATIONS DATA:
OPERATING RESULTS
Oil sales........................................ $ 133,445 $ 74,280 $ 207,725
Gas sales........................................ 150,549 68,910 219,459
NGLs sales....................................... 21,754 3,166 24,920
Other revenue(2)................................. 7,392 40,163 47,555
--------- --------- ---------
Total revenue............................... 313,140 186,519 499,659
--------- --------- ---------
Lease operating expenses......................... 65,655 35,242 100,897
Production taxes................................. 17,924 1,303 19,227
Depreciation, depletion and amortization......... 85,307 83,801 169,108
General and administrative expenses.............. 12,922 11,459 24,381
Interest expense................................. 274 18,514 18,788
Deferred effect of changes in foreign currency
exchange rate on long-term debt................ -- 5,860 5,860
Distributions on preferred securities of
subsidiary trust............................... 9,717 -- 9,717
Reduction of carrying value of oil and gas
properties(8).................................. -- 625,514 625,514
--------- --------- ---------
Total costs and expenses.................... 191,799 781,693 973,492
--------- --------- ---------
Earnings (loss) before income taxes.............. 121,341 (595,174) (473,833)
Income tax expense (benefit):
Current........................................ 25,202 1,655 26,857
Deferred....................................... 20,847 (221,546) (200,699)
--------- --------- ---------
Total income tax expense (benefit).......... 46,049 (219,891) (173,842)
--------- --------- ---------
Net earnings (loss).............................. $ 75,292 $(375,283) $(299,991)
========= ========= =========
Net earnings (loss) per share:
Basic.......................................... 2.34 (6.45)
Diluted........................................ 2.17 (6.45)
Cash dividends per share......................... 0.20 0.14
Weighted average common shares
outstanding -- basic........................... 32,216 46,535
Ratio of earnings to fixed charges(3)............ 12.52 NA
CASH FLOW DATA
Net cash provided by operating activities........ $ 168,722 $ 88,149 $ 256,871
Net cash used by investing activities............ (131,341) (3,774) (135,115)
Net cash used by financing activities............ (4,527) (105,389) (109,916)
Modified EBITDA(4)(6)............................ 216,639 138,515 355,154
Cash margin(5)(6)................................ 181,446 118,346 299,792
PRODUCTION, PRICE AND OTHER DATA
Production:
Oil (MBbls).................................... 7,005 4,778 11,783
Gas (MMcf)..................................... 69,327 52,483 121,810
NGLs (MBbls)................................... 1,626 265 1,891
MBoe(7)........................................ 20,185 13,790 33,975
Average prices:
Oil (per Bbl).................................. $ 19.05 $ 15.55 $ 17.63
Gas (per Mcf).................................. 2.17 1.31 1.80
NGLs (per Bbl)................................. 13.38 11.95 13.18
Per Boe(7)..................................... 15.15 10.61 13.38
Costs per Boe(7):
Operating costs................................ 4.14 2.65 3.55
Depreciation, depletion and amortization of oil
and gas properties.......................... 4.08 5.99 4.86
Reduction of carrying value of oil and gas
properties.................................. -- 45.36 18.41
General and administrative expenses............ 0.64 0.83 0.72
</TABLE>
16
<PAGE> 23
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1996
-------------------------------------
DEVON-
NORTHSTAR
DEVON NORTHSTAR PRO FORMA
HISTORICAL U.S. GAAP(1) COMBINED
---------- ------------ ---------
(THOUSANDS, EXCEPT PER SHARE DATA,
PER UNIT DATA AND RATIOS)
<S> <C> <C> <C>
OPERATIONS DATA:
OPERATING RESULTS
Oil sales........................................... $ 80,142 $ 55,881 $ 136,023
Gas sales........................................... 68,049 33,394 101,443
NGLs sales.......................................... 14,367 4,932 19,299
Other revenue(2).................................... 1,459 33,111 34,570
-------- --------- ---------
Total revenue.................................. 164,017 127,318 291,335
-------- --------- ---------
Lease operating expenses............................ 31,568 27,166 58,734
Production taxes.................................... 10,658 222 10,880
Depreciation, depletion and amortization............ 43,361 26,946 70,307
General and administrative expenses................. 9,101 6,010 15,111
Interest expense.................................... 5,277 7,385 12,662
Deferred effect of changes in foreign currency
exchange rate on long-term debt................... -- 199 199
Distributions on preferred securities of subsidiary
trust............................................. 4,753 -- 4,753
-------- --------- ---------
Total costs and expenses....................... 104,718 67,928 172,646
-------- --------- ---------
Earnings before income taxes........................ 59,299 59,390 118,689
Income tax expense:
Current........................................... 6,709 1,125 7,834
Deferred.......................................... 17,789 25,463 43,252
-------- --------- ---------
Total income tax expense....................... 24,498 26,588 51,086
-------- --------- ---------
Net earnings........................................ $ 34,801 $ 32,802 $ 67,603
======== ========= =========
Net earnings per share:
Basic............................................. 1.57 2.08
Diluted........................................... 1.52 2.01
Cash dividends per share............................ 0.14 0.18
Weighted average common shares
outstanding -- basic.............................. 22,160 32,449
Ratio of earnings to fixed charges(3)............... 6.76 7.50
CASH FLOW DATA
Net cash provided by operating activities........... $ 86,802 $ 57,570 $ 144,372
Net cash used by investing activities............... (94,817) (181,137) (275,954)
Net cash provided by financing activities........... 8,519 120,359 128,878
Modified EBITDA(4)(6)............................... 112,690 93,920 206,610
Cash margin(5)(6)................................... 95,951 85,410 181,361
PRODUCTION, PRICE AND OTHER DATA
Production:
Oil (MBbls)....................................... 3,816 2,964 6,780
Gas (MMcf)........................................ 35,714 26,472 62,186
NGLs (MBbls)...................................... 952 303 1,255
MBoe(7)........................................... 10,720 7,679 18,399
Average prices:
Oil (per Bbl)..................................... $ 21.00 $ 18.85 $ 20.06
Gas (per Mcf)..................................... 1.91 1.26 1.63
NGLs (per Bbl).................................... 15.09 16.28 15.38
Per Boe(7)........................................ 15.16 12.27 13.96
Costs per Boe(7):
Operating costs................................... 3.94 3.57 3.78
Depreciation, depletion and amortization of oil
and gas properties............................. 3.88 3.42 3.69
General and administrative expenses............... 0.85 0.78 0.82
</TABLE>
17
<PAGE> 24
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1995
---------------------------------------
DEVON-
NORTHSTAR
DEVON NORTHSTAR PRO FORMA
HISTORICAL U.S. GAAP(1) COMBINED
---------- ------------ ---------
(THOUSANDS, EXCEPT PER SHARE DATA,
PER UNIT DATA AND RATIOS)
<S> <C> <C> <C>
OPERATIONS DATA:
OPERATING RESULTS
Oil sales......................................... $ 55,290 $ 60,316 $115,606
Gas sales......................................... 50,732 20,462 71,194
NGLs sales........................................ 6,404 2,687 9,091
Other revenue(2).................................. 877 13,375 14,252
-------- -------- --------
Total revenue................................ 113,303 96,840 210,143
-------- -------- --------
Lease operating expenses.......................... 27,289 24,435 51,724
Production taxes.................................. 6,832 220 7,052
Depreciation, depletion and amortization.......... 38,090 35,350 73,440
General and administrative expenses............... 8,419 6,487 14,906
Interest expense.................................. 7,051 3,834 10,885
Deferred effect of changes in foreign currency
exchange rate on long-term debt................. -- 307 307
Reduction of carrying value of oil and gas
properties...................................... -- 97,061 97,061
-------- -------- --------
Total costs and expenses..................... 87,681 167,694 255,375
-------- -------- --------
Earnings (loss) before income taxes............... 25,622 (70,854) (45,232)
Income tax expense (benefit):
Current......................................... 4,495 797 5,292
Deferred........................................ 6,625 (31,256) (24,631)
-------- -------- --------
Total income tax expense (benefit)........... 11,120 (30,459) (19,339)
-------- -------- --------
Net earnings (loss)............................... $ 14,502 $(40,395) $(25,893)
======== ======== ========
Net earnings (loss) per share:
Basic........................................... 0.66 (0.81)
Diluted......................................... 0.65 (0.81)
Cash dividends per share.......................... 0.12 0.16
Weighted average common shares
outstanding -- basic............................ 22,074 32,119
Ratio of earnings to fixed charges(3)............. 4.54 NA
CASH FLOW DATA
Net cash provided by operating activities......... $ 61,276 $ 60,860 $122,136
Net cash used by investing activities............. (110,558) (141,006) (251,564)
Net cash provided by financing activities......... 49,844 74,869 124,713
Modified EBITDA(4)(6)............................. 70,763 65,697 136,460
Cash margin(5)(6)................................. 59,217 61,067 120,284
PRODUCTION, PRICE AND OTHER DATA
Production:
Oil (MBbls)..................................... 3,300 3,830 7,130
Gas (MMcf)...................................... 36,886 21,348 58,234
NGLs (MBbls).................................... 600 231 831
MBoe(7)......................................... 10,047 7,619 17,666
Average prices:
Oil (per Bbl)................................... $ 16.75 $ 15.75 $ 16.21
Gas (per Mcf)................................... 1.38 0.96 1.22
NGLs (per Bbl).................................. 10.68 11.63 10.94
Per Boe(7)...................................... 11.19 10.95 11.09
Costs per Boe(7):
Operating costs................................. 3.40 3.24 3.33
Depreciation, depletion and amortization of oil
and gas properties........................... 3.65 4.56 4.04
Reduction of carrying value of oil and gas
properties................................... -- 12.74 5.49
General and administrative expenses............. 0.84 0.85 0.84
</TABLE>
18
<PAGE> 25
- ---------------
(1) The Northstar U.S. GAAP financial information is presented using U.S. GAAP
and in U.S. dollars. See "Unaudited U.S. GAAP Financial
Information -- Northstar" included elsewhere herein for detailed
descriptions of the adjustments made to convert Northstar's historical data
from Canadian GAAP and Canadian dollars to U.S. GAAP and U.S. dollars.
(2) Devon-Northstar pro forma combined other revenues consists of the following
items:
<TABLE>
<CAPTION>
SIX MONTHS
ENDED JUNE 30, YEAR ENDED DECEMBER 31,
----------------- ---------------------------
1998 1997 1997 1996 1995
------- ------- ------- ------- -------
(THOUSANDS)
<S> <C> <C> <C> <C> <C>
Third party gas processing income........ $ 3,400 $ 5,176 $ 7,318 $ 6,313 $ 1,465
Gain from termination of gas contract.... 5,047 -- -- -- --
Management contract termination fee...... 2,765 -- -- -- --
Gain (loss) on sale of assets............ (57) 29,381 29,573 10,598 (273)
Management and administration fees....... 1,031 2,919 4,963 6,209 4,579
Alberta royalty tax credits.............. 966 1,034 2,137 1,191 1,076
Marketing revenues....................... (3) 203 165 688 1,273
Pipeline revenues........................ -- -- -- 3,455 3,179
Earnings (loss) from investments in
unconsolidated subsidiaries............ (902) (1,959) 382 3,559 684
Interest and other....................... 1,150 593 3,017 2,557 2,269
------- ------- ------- ------- -------
Total.......................... $13,397 $37,347 $47,555 $34,570 $14,252
======= ======= ======= ======= =======
</TABLE>
In the six month period ended June 30, 1998, Northstar U.S. GAAP other
revenues included $1.0 million of management and administration fees.
However, the arrangements under which such fees were generated were
terminated during the second quarter of 1998. Northstar received $2.8
million in June 1998 related to the termination of such management
arrangements. Also in June 1998, Northstar received a one-time payment of
$5.0 million from a gas purchaser for the termination of a gas contract.
(3) For purposes of calculating the ratio of earnings to fixed charges, (i)
earnings consist of earnings before income taxes, plus fixed charges, and
(ii) fixed charges consist of interest expense, distributions on preferred
securities of subsidiary trust, amortization of costs relating to
indebtedness and the preferred securities of subsidiary trust, and one-third
of rental expense estimated to be attributable to interest. For the years
ended December 31, 1997 and 1995, the Devon-Northstar combined earnings were
insufficient to cover fixed charges by $473.8 million and $45.2 million,
respectively.
(4) Modified EBITDA represents earnings before interest (including Devon's
distributions on preferred securities of subsidiary trust and, under U.S.
GAAP, Northstar's deferred effect of changes in foreign currency exchange
rate on long-term debt), taxes, depreciation, depletion and amortization.
(5) "Cash margin" equals total revenues less cash expenses. Cash expenses are
all expenses other than the non-cash expenses of depreciation, depletion and
amortization, deferred effect of changes in foreign currency exchange rate
on long-term debt and deferred income tax expense. Cash margin measures the
net cash that is generated by a company's operations during a given period,
without regard to the period such cash is actually physically received or
spent by the company. This margin ignores the non-operational effect on a
company's "net cash provided by operating activities," as measured by
generally accepted accounting principles, from a company's activities as an
operator of oil and gas wells. Such activities produce net increases or
decreases in temporary cash funds held by the operator which have no effect
on net earnings of the company.
(6) Modified EBITDA is presented because it is commonly accepted in the oil and
gas industry as a financial indicator of a company's ability to service or
incur debt and because it is a component of Devon's and Northstar's debt
covenants. Cash margin is presented because it is commonly accepted in the
oil and gas industry as a financial indicator of a company's ability to fund
capital expenditures or service debt. Modified EBITDA and cash margin are
also presented because investors routinely request such
19
<PAGE> 26
information. Management interprets the trends of modified EBITDA and cash
margin in a similar manner as trends in net earnings.
Modified EBITDA and cash margin should be used as supplements to, and not
as substitutes for, net earnings and net cash provided by operating
activities determined in accordance with generally accepted accounting
principles as measures of Devon's pro forma profitability or liquidity.
There may be operational or financial demands and requirements that reduce
management's discretion over the use of modified EBITDA and cash margin.
See "Devon Management's Discussion and Analysis of Financial Condition and
Results of Operations" in Devon's Annual Report on Form 10-K for the fiscal
year ended December 31, 1997 and Devon's Quarterly Report on Form 10-Q for
the quarter ended June 30, 1998, copies of which are included herewith, and
see "Northstar Management's Discussion and Analysis of Financial Condition
and Results of Operations" elsewhere in this Joint Proxy Statement.
Modified EBITDA and cash margin may not be comparable to similarly titled
measures used by other companies.
(7) Gas volumes are converted to Boe or MBoe at the rate of six Mcf of gas per
Bbl of oil, based upon the approximate relative energy content of natural
gas and oil, which rate is not necessarily indicative of the relationship of
oil and gas prices. The respective prices of oil, gas and NGLs are affected
by market and other factors in addition to relative energy content.
(8) Under U.S. GAAP, companies using the full cost method of accounting for oil
and gas properties are required to make a "ceiling" calculation that
compares the net book value of the oil and gas properties, less related
deferred income taxes, to the estimated after-tax future net revenues from
proved oil and gas properties, discounted at 10% per year. To the extent
that the net book value, less related deferred income taxes, exceeds the
"ceiling," a reduction of carrying value of oil and gas properties is
required. As of December 31, 1997 and 1995, the carrying value of
Northstar's oil and gas properties, less deferred income taxes, restated to
the U.S. GAAP full cost method of accounting, exceeded the full cost ceiling
by $397.9 million and $53.8 million, respectively. Accordingly, under U.S.
GAAP, a $625.5 million reduction of the carrying value of oil and gas
properties was recorded in 1997, partially offset by a related $227.6
million deferred income tax benefit, and a $97.1 million reduction of the
carrying value was recorded in 1995, partially offset by a related $43.3
million deferred tax benefit.
20
<PAGE> 27
SUMMARY HISTORICAL SELECTED FINANCIAL AND PRODUCTION DATA
The following tables set forth certain historical financial and production
data of Devon and Northstar. See "Devon's Selected Financial Data," "Northstar's
Selected Financial Data," "Business of Devon," "Business of Northstar," "Devon
Management's Discussion and Analysis of Financial Condition and Results of
Operations," and "Northstar Management's Discussion and Analysis of Financial
Condition and Results of Operations." The data regarding Devon should be read in
conjunction with Devon's consolidated financial statements and the notes
thereto, which are included in Devon's Form 10-K for the year ended December 31,
1997, and Devon's Form 10-Q for the quarter ended June 30, 1998, copies of which
are included herewith. Northstar's audited consolidated financial statements
included in this Joint Proxy Statement are presented in Canadian GAAP and
Canadian dollars. For the convenience of the reader in assessing the comparative
results of Northstar and Devon, financial data has been presented translating
Northstar's results into U.S. GAAP. See "Unaudited U.S. GAAP Financial
Information -- Northstar." The data regarding Northstar should be read in
conjunction with Northstar's consolidated financial statements and the notes
thereto which are included elsewhere herein. See Note 13 to Northstar's
consolidated financial statements for a reconciliation of Canadian GAAP in
Canadian dollars to U.S. GAAP in Canadian dollars. See also "Summary Unaudited
Pro Forma Combined Financial Information." The unaudited consolidated financial
data as of and for the periods ended June 30, 1998 and 1997, have been prepared
on a basis consistent with the audited consolidated financial statements and, in
the opinion of Devon and Northstar management, include all adjustments,
consisting of normal recurring accrual adjustments, which are necessary for a
fair presentation of the results for the interim periods.
<TABLE>
<CAPTION>
SIX MONTHS
ENDED JUNE 30, YEAR ENDED DECEMBER 31,
------------------- ------------------------------
1998 1997 1997(1) 1996(1) 1995(1)
-------- -------- -------- -------- --------
(THOUSANDS, EXCEPT PER SHARE DATA,
PER UNIT DATA AND RATIOS)
<S> <C> <C> <C> <C> <C>
DEVON:
OPERATING RESULTS
Oil sales............................................... $ 45,564 $ 69,590 $133,445 $ 80,142 $ 55,290
Gas sales............................................... 70,279 73,414 150,549 68,049 50,732
NGLs sales.............................................. 7,988 11,328 21,754 14,367 6,404
Other revenue........................................... 3,603 3,219 7,392 1,459 877
-------- -------- -------- -------- --------
Total revenue....................................... 127,434 157,551 313,140 164,017 113,303
Lease operating expenses................................ 37,112 30,341 65,655 31,568 27,289
Production taxes........................................ 6,539 9,055 17,924 10,658 6,832
Depreciation, depletion and amortization................ 45,024 40,142 85,307 43,361 38,090
General and administrative expenses..................... 6,740 6,236 12,922 9,101 8,419
Interest expense........................................ 51 159 274 5,277 7,051
Distributions on preferred securities of subsidiary
trust................................................. 4,859 4,859 9,717 4,753 --
Net earnings............................................ 17,756 40,056 75,292 34,801 14,502
Net earnings per share:
Basic................................................. 0.55 1.25 2.34 1.57 0.66
Diluted............................................... 0.55 1.15 2.17 1.52 0.65
Cash dividends per share................................ 0.10 0.10 0.20 0.14 0.12
Weighted average common shares outstanding -- basic..... 32,320 32,154 32,216 22,160 22,074
Ratio of earnings to fixed charges(2)................... 6.19 13.67 12.52 6.76 4.54
BALANCE SHEET DATA (END OF PERIOD)
Total assets............................................ $863,157 $801,065 $846,403 $746,251 $421,564
Long-term debt.......................................... -- -- -- 8,000 143,000
Convertible preferred securities of subsidiary trust.... 149,500 149,500 149,500 149,500 --
Stockholders' equity.................................... 556,551 509,637 543,576 472,404 219,041
CASH FLOW DATA
Net cash provided by operating activities............... 67,618 93,753 168,722 86,802 61,276
Net cash used by investing activities................... (88,746) (50,588) (131,341) (94,817) (110,558)
Net cash provided (used) by financing activities........ 2,370 (9,688) (4,527) 8,519 49,844
Modified EBITDA(3)(5)................................... 77,042 111,919 216,639 112,690 70,763
Cash margin(4)(5)....................................... 67,497 98,356 181,446 95,951 59,217
PRODUCTION, PRICE AND OTHER DATA
Production:
Oil (MBbls)........................................... 3,397 3,493 7,005 3,816 3,300
Gas (MMcf)............................................ 36,618 34,332 69,327 35,714 36,886
NGLs (MBbls).......................................... 802 800 1,626 952 600
MBoe(6)............................................... 10,303 10,016 20,185 10,720 10,047
Average prices:
Oil (per Bbl)......................................... $ 13.41 $ 19.92 $ 19.05 $ 21.00 $ 16.75
Gas (per Mcf)......................................... 1.92 2.14 2.17 1.91 1.38
NGLs (per Bbl)........................................ 9.95 14.15 13.38 15.09 10.68
Per Boe(6)............................................ 12.02 15.41 15.15 15.16 11.19
Costs per Boe(6):
Operating costs....................................... 4.24 3.93 4.14 3.94 3.40
Depreciation, depletion and amortization of oil and
gas properties...................................... 4.23 3.87 4.08 3.88 3.65
General and administrative expenses................... 0.65 0.62 0.64 0.85 0.84
</TABLE>
21
<PAGE> 28
<TABLE>
<CAPTION>
SIX MONTHS
ENDED JUNE 30, YEAR ENDED DECEMBER 31,
----------------------- ----------------------------------
1998(7) 1997(7) 1997(7) 1996(7) 1995(7)
--------- ----------- ---------- --------- ---------
(THOUSANDS, EXCEPT PER SHARE DATA, PER UNIT DATA AND RATIOS)
<S> <C> <C> <C> <C> <C>
NORTHSTAR -- USING U.S. GAAP
OPERATING RESULTS
Oil sales.................... C$ 43,410 C$ 39,221 C$ 102,824 C$ 76,236 C$ 82,658
Gas sales.................... 52,475 34,508 95,391 45,559 28,041
NGLs sales................... 2,458 2,962 4,382 6,728 3,682
Other revenue(8)............. 14,168 47,314 55,596 45,172 18,330
--------- ----------- ---------- --------- ---------
Total revenue........... 112,511 124,005 258,193 173,695 132,711
Lease operating expenses..... 29,751 21,611 48,784 37,062 33,486
Production taxes............. 1,052 794 1,804 303 301
Depreciation, depletion and
amortization............... 23,338 40,869 116,003 36,761 48,445
General and administrative
expenses................... 7,296 7,686 15,863 8,199 8,890
Interest expense............. 15,602 7,607 25,629 10,075 5,254
Deferred effect of changes in
foreign currency exchange
rate on long-term debt..... 10,012 369 8,111 272 421
Reduction of carrying value
of oil and gas
properties(9).............. -- -- 865,883 -- 133,015
Net earnings (loss).......... 12,503 23,848 (519,495) 44,750 (55,359)
Net earnings (loss) per
share:
Basic...................... 0.18 0.35 (8.24) 0.99 (1.25)
Diluted.................... 0.18 0.35 (8.24) 0.99 (1.25)
Cash dividends per
share(10).................. -- -- -- 0.06 0.06
Weighted average common
shares
outstanding -- basic....... 68,167 68,761 63,080 45,326 44,250
Ratio of earnings to fixed
charges(2)................. 1.99 6.57 NA 8.47 NA
BALANCE SHEET DATA (END OF
PERIOD)
Total assets................. C$634,628 C$1,345,821 C$ 674,906 C$642,892 C$403,145
Long-term debt............... 443,384 432,242 436,383 102,720 105,249
Stockholders' equity......... 89,969 617,872 75,704 282,658 239,604
CASH FLOW DATA
Net cash provided by
operating activities....... 41,563 30,138 122,022 78,540 83,404
Net cash provided (used) by
investing activities....... 29,120 148,441 (5,224) (247,118) (193,239)
Net cash provided (used) by
financing activities....... (70,683) (207,668) (145,887) 164,200 102,603
Modified EBITDA(3)(5)........ 74,412 93,914 191,742 128,131 90,034
Cash margin(4)(5)............ 57,805 85,224 163,822 116,521 83,688
PRODUCTION, PRICE AND OTHER DATA
Production:
Oil (MBbls)................ 2,708 1,873 4,778 2,964 3,830
Gas (MMcf)................. 30,044 19,350 52,483 26,472 21,348
NGLs (MBbls)............... 241 122 265 303 231
MBoe(6).................... 7,956 5,220 13,790 7,679 7,619
Average prices:
Oil (per Bbl).............. C$ 16.03 C$ 20.94 C$ 21.52 C$ 25.72 C$ 21.58
Gas (per Mcf).............. 1.75 1.78 1.82 1.72 1.31
NGLs (per Bbl)............. 10.20 24.28 16.54 22.21 15.94
Per Boe(6)................. 12.37 14.69 14.69 16.74 15.01
Costs per Boe(6):
Operating costs............ 3.87 4.29 3.67 4.87 4.43
Depreciation, depletion and
amortization of oil and
gas properties.......... 2.83 7.68 8.29 4.67 6.25
Reduction of carrying value
of oil and gas
properties.............. -- -- 62.79 -- 17.46
General and administrative
expenses................ 0.92 1.47 1.15 1.07 1.17
</TABLE>
22
<PAGE> 29
<TABLE>
<CAPTION>
SIX MONTHS
ENDED JUNE 30, YEAR ENDED DECEMBER 31,
------------------------- -------------------------------------
1998(7) 1997(7) 1997(7) 1996(7) 1995(7)
----------- ----------- ----------- ----------- ---------
(THOUSANDS, EXCEPT PER SHARE DATA, PER UNIT DATA AND RATIOS)
<S> <C> <C> <C> <C> <C>
NORTHSTAR -- USING CANADIAN GAAP
OPERATING RESULTS
Oil sales................... C$ 54,453 C$ 81,921 C$ 165,385 C$ 195,497 C$156,755
Gas sales................... 72,691 67,782 139,776 123,504 93,221
NGLs sales.................. 2,300 7,541 8,114 15,127 11,143
Less royalties.............. (19,177) (34,381) (57,776) (63,138) (43,372)
----------- ----------- ----------- ----------- ---------
Oil, gas and NGLs sales, net
of royalties.............. 110,267 122,863 255,499 270,990 217,747
Other revenue(8)............ 44,153 47,177 51,387 37,140 12,163
----------- ----------- ----------- ----------- ---------
Total revenue.......... 154,420 170,040 306,886 308,130 229,910
Lease operating expenses.... 29,110 24,585 53,274 56,940 47,852
Depreciation, depletion and
amortization.............. 61,353 56,391 118,815 119,828 101,353
General and administrative
expenses.................. 6,876 7,222 12,494 7,639 8,969
Interest expense............ 15,602 9,171 31,305 17,105 12,392
Net earnings................ 32,705 40,982 50,065 62,062 36,578
Net earnings per share:
Basic..................... 0.48 0.52 0.68 0.72 0.45
Diluted................... 0.46 0.50 0.66 0.70 0.44
Cash dividends per
share(10)................. -- -- -- 0.03 0.03
Weighted average common
shares
outstanding -- basic...... 68,167 79,186 73,505 85,832 81,270
Ratio of earnings to fixed
charges (2)............... 3.64 8.84 3.68 7.20 4.74
BALANCE SHEET DATA (END OF PERIOD)
Total assets................ C$1,169,202 C$1,059,121 C$1,178,162 C$1,244,884 C$924,781
Long-term debt.............. 443,384 432,242 435,141 184,896 210,529
Stockholders' equity........ 426,563 381,899 392,095 638,072 521,687
CASH FLOW DATA
Net cash provided by
operating activities...... 49,127 68,527 170,885 200,776 147,286
Net cash provided (used) by
investing activities...... 21,499 120,458 (42,100) (366,984) (368,264)
Net cash provided (used) by
financing activities...... (70,626) (222,844) (162,644) 190,189 208,283
Modified EBITDA(3)(5)....... 118,434 138,233 241,118 243,551 173,089
Cash margin(4)(5)........... 101,561 127,626 206,987 223,619 159,001
PRODUCTION, PRICE AND OTHER
DATA
Production(11):
Oil (MBbls)............... 3,380 3,695 7,472 7,985 7,425
Gas (MMcf)................ 36,665 35,280 74,664 77,958 68,478
NGLs (MBbls).............. 225 320 456 765 776
MBoe(12).................. 7,272 7,543 15,394 16,546 15,048
Average prices(13):
Oil (per Bbl)............. C$ 16.11 C$ 22.17 C$ 22.13 C$ 24.48 C$ 21.11
Gas (per Mcf)............. 1.98 1.92 1.87 1.58 1.36
NGLs (per Bbl)............ 10.22 23.57 17.79 19.77 14.36
Per Boe(12)............... 17.80 20.85 20.38 20.22 17.35
Costs per Boe(12)(14):
Operating costs........... 4.00 3.26 3.47 3.45 3.18
Depreciation, depletion
and amortization of oil
and gas properties..... 8.32 7.37 7.61 7.14 6.63
General and administrative
expenses............... 0.95 0.96 0.81 0.46 0.60
</TABLE>
23
<PAGE> 30
- ---------------
(1) On December 31, 1996, Devon acquired all of Kerr-McGee Corporation's North
American onshore oil and gas exploration and production business and
properties. The acquisition was accounted for by the purchase method of
accounting. Accordingly, the operating results from the acquired properties
are not included in Devon's results prior to the year 1997. For certain pro
forma financial information for the years 1995 and 1996 assuming this
acquisition was consummated at the beginning of such periods, see Note 2 to
Devon's 1997 consolidated financial statements included in Devon's Form
10-K for the year ended December 31, 1997, a copy of which is included
herewith.
(2) For purposes of calculating the ratio of earnings to fixed charges, (i)
earnings consist of earnings before income taxes, plus fixed charges, and
(ii) fixed charges consist of interest expense, distributions on preferred
securities of subsidiary trust, amortization of costs relating to
indebtedness and the preferred securities of subsidiary trust, and
one-third of rental expense estimated to be attributable to interest. Using
U.S. GAAP, Northstar's earnings for the years ended December 31, 1997 and
1995, were insufficient to cover fixed charges by C$823.9 million and
C$97.1 million, respectively.
(3) Modified EBITDA represents earnings before interest (including Devon's
distributions on preferred securities of subsidiary trust and, under U.S.
GAAP, Northstar's deferred effect of changes in foreign currency exchange
rate on long-term debt), taxes, depreciation, depletion and amortization.
(4) "Cash margin" equals total revenues less cash expenses. Cash expenses are
all expenses other than the non-cash expenses of depreciation, depletion
and amortization, deferred effect of changes in foreign currency exchange
rate on long-term debt and deferred income tax expense. Cash margin
measures the net cash that is generated by a company's operations during a
given period, without regard to the period such cash is actually physically
received or spent by the company. This margin ignores the non-operational
effect on a company's "net cash provided by operating activities," as
measured by generally accepted accounting principles, from a company's
activities as an operator of oil and gas wells. Such activities produce net
increases or decreases in temporary cash funds held by the operator which
have no effect on net earnings of the company.
(5) Modified EBITDA is presented because it is commonly accepted in the oil and
gas industry as a financial indicator of a company's ability to service or
incur debt and because it is a component of Devon's and Northstar's debt
covenants. Cash margin is presented because it is commonly accepted in the
oil and gas industry as a financial indicator of a company's ability to
fund capital expenditures or service debt. Modified EBITDA and cash margin
are also presented because investors routinely request such information.
Management interprets the trends of modified EBITDA and cash margin in a
similar manner as trends in net earnings.
Modified EBITDA and cash margin should be used as supplements to, and not
as substitutes for, net earnings and net cash provided by operating
activities determined in accordance with generally accepted accounting
principles as measures of Devon's or Northstar's profitability or
liquidity. There may be operational or financial demands and requirements
that reduce management's discretion over the use of modified EBITDA and
cash margin. See "Devon Management's Discussion and Analysis of Financial
Condition and Results of Operations" in Devon's Annual Report on Form 10-K
for the fiscal year ended December 31, 1997 and Devon's Quarterly Report on
Form 10-Q for the quarter ended June 30, 1998, copies of which are included
herewith, and see "Northstar Management's Discussion and Analysis of
Financial Condition and Results of Operations" elsewhere in this Joint
Proxy Statement. Modified EBITDA and cash margin may not be comparable to
similarly titled measures used by other companies.
(6) Gas volumes are converted to Boe or MBoe under U.S. GAAP at the rate of six
Mcf of gas per Bbl of oil, based upon the approximate relative energy
content of natural gas and oil, which rate is not necessarily indicative of
the relationship of oil and gas prices. The respective prices of oil, gas
and NGLs are affected by market and other factors in addition to relative
energy content.
(7) In March, 1997, Northstar acquired all the outstanding common shares of
Morrison by issuing approximately 46.1 million Northstar Common Shares. The
Northstar Common Shares received by the Morrison shareholders represented
approximately 53% of the combined company's outstanding shares. Therefore,
under U.S. GAAP, this transaction would be accounted for as a reverse
acquisition of
24
<PAGE> 31
Northstar by Morrison. Accordingly, the results presented for periods
through March, 1997 for Northstar using U.S. GAAP represent the historical
results of Morrison, the "accounting acquirer." Because Northstar was the
"legal acquirer," the financial results for periods through March, 1997,
are referred to as "Northstar's" results, even though they represent the
historical results of Morrison. For periods subsequent to March, 1997, the
results presented for Northstar using U.S. GAAP represent the historical
results of Morrison, combined with the results of Northstar after valuing
Northstar's March, 1997, assets and liabilities at fair value, rather than
historical book value.
Under Canadian GAAP, the Morrison transaction was accounted for under the
pooling-of-interests method of accounting. Accordingly, for Northstar's
results presented using Canadian GAAP, the historical results of Northstar
and Morrison have been combined for all periods presented.
(8) Under U.S. GAAP, Northstar's other revenues consisted of the following
items:
<TABLE>
<CAPTION>
SIX MONTHS
ENDED JUNE 30, YEAR ENDED DECEMBER 31,
------------------- ------------------------------
1998 1997 1997 1996 1995
-------- -------- -------- -------- --------
(THOUSANDS)
<S> <C> <C> <C> <C> <C>
Third party gas processing income.... C$ 2,577 C$ 4,976 C$ 5,602 C$ 8,613 C$ 2,008
Gain from termination of gas
contract........................... 7,300 -- -- -- --
Management contract termination
fee................................ 4,000 -- -- -- --
Gain (loss) on sale of assets........ (198) 40,696 40,671 14,453 --
Management and administration fees... 1,433 3,991 6,766 8,382 6,176
Alberta royalty tax credits.......... 748 878 1,732 1,625 1,474
Marketing revenues................... -- -- -- (633) 178
Pipeline revenues.................... -- -- -- 4,714 4,357
Earnings (loss) from equity
investments........................ (1,304) (2,717) 529 4,856 937
Interest and other................... (388) (510) 296 3,162 3,200
-------- -------- -------- -------- --------
Total....................... C$14,168 C$47,314 C$55,596 C$45,172 C$18,330
======== ======== ======== ======== ========
</TABLE>
Under Canadian GAAP, Northstar's other revenues consisted of the following
items:
<TABLE>
<CAPTION>
SIX MONTHS
ENDED JUNE 30, YEAR ENDED DECEMBER 31,
------------------- ------------------------------
1998 1997 1997 1996 1995
-------- -------- -------- -------- --------
(THOUSANDS)
<S> <C> <C> <C> <C> <C>
Gain (loss) on sale of assets........ C$39,949 C$40,696 C$40,671 C$14,453 C$ --
Management contract termination
fee................................ 4,000 -- -- -- --
Earnings (loss) from equity
investments........................ -- 3,999 8,578 8,111 1,905
Operator overhead.................... 592 888 1,504 963 793
Marketing revenues................... -- -- -- (633) 178
Administration fees.................. -- 79 79 1,636 1,614
Pipeline revenues.................... -- -- -- 4,714 4,357
Processing fees...................... -- -- -- 4,221 --
Interest and other................... (388) 1,515 555 3,675 3,316
-------- -------- -------- -------- --------
Total....................... C$44,153 C$47,177 C$51,387 C$37,140 C$12,163
======== ======== ======== ======== ========
</TABLE>
See notes 3 and 11 to Northstar's consolidated financial statements
included elsewhere in this Joint Proxy Statement for additional information
regarding the gains on sales of assets recognized by Northstar under
Canadian GAAP as shown in the above table.
(9) Under U.S. GAAP, companies using the full cost method of accounting for oil
and gas properties are required to make a "ceiling" calculation that
compares the net book value of the oil and gas properties, less related
deferred income taxes, to the estimated after-tax future net revenues from
proved oil and gas properties, discounted at 10% per year. To the extent
that the net book value, less related deferred income taxes, exceeds the
"ceiling", a reduction of carrying value of oil and gas properties is
required. As of December 31, 1997 and 1995, the carrying value of
Northstar's oil and gas properties, less deferred income taxes, restated to
the U.S. GAAP full cost method of accounting, exceeded the full cost
ceiling by C$550.9 million and C$73.7 million, respectively. Accordingly, a
C$865.9 million reduction of the
25
<PAGE> 32
carrying value of oil and gas properties was recorded in 1997, partially
offset by a related C$315.0 million deferred income tax benefit, and a
C$133.0 million reduction of the carrying value was recorded in 1995,
partially offset by a related C$59.3 million deferred tax benefit.
(10) Dividends shown represent dividends paid by Morrison on its common shares.
(11) Northstar's production volumes using Canadian GAAP include gross volumes
attributable to Northstar and the respective royalty interests.
(12) Northstar's gas volumes for Canadian GAAP are converted to Boe or MBoe at
the rate of ten Mcf of gas per Bbl of oil.
(13) Northstar's average prices using Canadian GAAP are the gross values of oil,
gas and NGLs sales, including royalties, divided by the gross volumes
described in (11) above.
(14) Northstar's costs per Boe using Canadian GAAP are calculated using the
gross volumes described in (11) above.
RECENT DEVELOPMENTS
On October 26, 1998, Devon announced its financial results for the third
quarter and nine months ended September 30, 1998. Devon reported a loss for both
periods resulting from an $88.0 million after-tax, non-cash reduction in the
book value of its domestic oil and gas properties. This reduction was caused by
the application of the "full cost ceiling test" described further below. For the
quarter ended September 30, 1998, Devon recorded a net loss of $83.1 million, or
$2.57 per share. This compares to third quarter 1997 net earnings of $16.3
million, or $0.51 per share ($0.47 per diluted share). Earnings for the 1998
third quarter before the full cost ceiling adjustment were $4.9 million, or
$0.15 per share.
For the first nine months of 1998 Devon reported a net loss of $65.3
million, or $2.02 per share. This compares to net earnings of $56.4 million, or
$1.75 per share ($1.62 per diluted share) in the comparable 1997 period.
Earnings before the full cost ceiling adjustment were $22.7 million, or $0.70
per share, for the nine months ended September 30, 1998.
The $88.0 million after-tax, non-cash charge is attributable to a $126.9
million reduction in the book value of Devon's domestic oil and gas properties,
partially offset by a related tax benefit of $38.9 million. The charge was a
result of the application of the "ceiling test" as prescribed by the SEC for
companies that follow the "full cost" method of accounting. Under the full cost
method of accounting, a company's net book value of its oil and gas properties,
less related deferred income taxes, may not exceed a calculated "ceiling". The
ceiling is the estimated after-tax future net revenues, discounted at 10 percent
per year, from proved oil and gas properties. Any excess is written off as a
non-cash expense. The expense may not be reversed in future periods, even though
higher oil and gas prices may subsequently increase the ceiling. A company must
use the prices in effect at the end of each accounting quarter to calculate the
ceiling value of reserves. Future net revenues are calculated assuming
continuation of prices and costs in effect at the time of the calculation,
except for changes that are fixed and determinable by existing contracts. See
"Risk Factors -- Financial Reporting Impact of Oil and Gas Accounting."
In spite of steady overall production, total revenues decreased 22% to
$57.1 million in the 1998 third quarter. The decrease was due almost entirely to
lower combined oil, gas and natural gas liquids prices. The average price Devon
received for its third quarter oil production fell 33%, from $18.13 per Bbl in
1997 to $12.09 per Bbl in 1998. The average price received for Devon's third
quarter gas production decreased 8%, from $1.92 per Mcf in 1997 to $1.77 per Mcf
in 1998. Devon's NGL price also declined in the most recent quarter dropping
34%, from $12.56 per Bbl in 1997 to $8.30 per Bbl in 1998.
Devon's total production of oil, gas and natural gas liquids for third
quarter 1998 of 5.1 MMBoe was consistent with that of the 1997 third quarter. A
4% increase in gas production offset a decline in oil and NGL production. The
increase in gas production was attributable to wells added during the last 12
months coupled with an increase in production from Devon's Northeast Blanco
Unit. Over the last two years, Devon has
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conducted a program of mechanical improvements designed to increase production
from the Northeast Blanco Unit.
Total pre-tax expenses rose $131.6 million, to $177.2 million in third
quarter 1998. This increase was due primarily to the previously discussed $126.9
million non-cash full cost ceiling adjustment. Increases in DD&A and lease
operating expenses accounted for most of the remaining increase in pre-tax
expenses.
DD&A expense increased $2.9 million during third quarter 1998 to $23.2
million. This expense increase was due to a higher DD&A rate in the 1998
quarter. Devon's third quarter DD&A rate increased from $3.83 per Boe in 1997 to
$4.41 per Boe in 1998.
Lease operating expense increased $2.4 million, to $18.2 million in the
1998 quarter. The cost associated with new wells added since the third quarter
of 1997 was the largest contributor to this increase.
Devon recognized a $37.1 million income tax benefit in the most recent
quarter compared to a $10.9 million income tax expense in the third quarter of
1997. The third quarter 1998 tax benefit resulted from the full cost ceiling
adjustment. Without the full cost ceiling adjustment the company would have
recognized $1.8 million of income tax expense during the third quarter of 1998.
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GLOSSARY OF TERMS
Unless the context otherwise requires, the following terms shall have the
meanings set forth below when used in this Joint Proxy Statement. These defined
terms are not used in the Annexes, the financial statements or other documents
attached hereto or incorporated by reference herein.
"ABCA" means the Business Corporations Act (Alberta), as amended.
"AMEX" means the American Stock Exchange.
"Arrangement" means the proposed arrangement of Northstar under section 186
of the ABCA pursuant to the Plan of Arrangement.
"Arrangement Resolution" means the special resolution of Northstar
Shareholders and Northstar Optionholders approving the Arrangement in the form
set out in Annex A to this Joint Proxy Statement.
"ASE" means The Alberta Stock Exchange.
"Automatic Exchange Right" means the right granted to the Trustee for the
benefit of the holders of the Exchangeable Shares pursuant to the Voting and
Exchange Trust Agreement to automatically exchange with Devon the Exchangeable
Shares for shares of Devon Common Stock upon a Devon Liquidation Event.
"Automatic Redemption Date" means the date for the automatic redemption by
Northstar of Exchangeable Shares pursuant to the Exchangeable Share Provisions,
which date shall be the first to occur of: (i) the 10th anniversary of the
Effective Date of the Arrangement; (ii) the date selected by the Northstar Board
(such date to be no earlier than the third anniversary of the Effective Date of
the Arrangement) at a time when less than 5% of the number of Exchangeable
Shares issuable on the Effective Date (other than Exchangeable Shares held by
Devon and its Subsidiaries, and as such number of shares may be adjusted as
deemed appropriate by the Northstar Board to give effect to any subdivision or
consolidation of or stock dividend on the Exchangeable Shares, any issuance or
distribution of rights to acquire Exchangeable Shares or securities exchangeable
for or convertible into or carrying rights to acquire Exchangeable Shares, any
issue or distribution of other securities or rights or evidences of indebtedness
or assets, or any other capital reorganization or other transaction involving or
affecting the Exchangeable Shares) are outstanding; (iii) the Business Day prior
to the record date for any meeting or vote of the shareholders of Northstar to
consider any matter on which the holders of Exchangeable Shares would be
entitled to vote as shareholders of Northstar, but excluding any meeting or vote
as described in clause (iv) below; (iv) the Business Day following the day on
which the holders of Exchangeable Shares fail to take the necessary action at a
meeting or other vote of holders of Exchangeable Shares, if and to the extent
such action is required, to approve or disapprove, as applicable, any change to,
or in the rights of the holders of, Exchangeable Shares, if the approval or
disapproval, as applicable, of such change would be required to maintain the
economic and legal equivalence of the Exchangeable Shares and the Devon Common
Stock; or (v) the date on which the share purchase rights issued pursuant to the
Rights Agreement (or pursuant to any similar successor or replacement rights
agreement) would separate from the shares of Devon Common Stock and become
exercisable.
"Business Day" means any day other than a Saturday, a Sunday or a day when
banks are not open for business in either or both of Oklahoma City, Oklahoma or
Calgary, Alberta.
"Call Rights" means the Liquidation Call Right, the Redemption Call Right
and the Retraction Call Right, collectively.
"Canadian dollars", "Cdn. $" or "C$" means Canadian dollars.
"Canadian GAAP" means generally accepted accounting principles in Canada.
"Canadian Tax Act" means the Income Tax Act (Canada), as amended.
"Certificate Amendment" means the amendment to Devon's Certificate of
Incorporation designating a class of Special Voting Stock consisting of the
Voting Share and making conforming changes to accommodate such Special Voting
Stock.
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"Closing" means the execution and delivery of the documents required to
effectuate the transactions contemplated by the Combination Agreement and the
closing of the transactions contemplated by the Combination Agreement.
"Closing Date" means December 10, 1998, or such other date as may be
determined by Devon and Northstar.
"Combination" means the transactions contemplated by the Combination
Agreement and by the Plan of Arrangement, whereby, among other things, Devon
would become the sole holder of the Northstar Common Shares outstanding after
giving effect to the Arrangement.
"Combination Agreement" means the Amended and Restated Combination
Agreement by and between Devon and Northstar dated as of June 29, 1998, a copy
of which is attached hereto as Annex B.
"Competition Act" means the Competition Act (Canada), as amended.
"Court" means the Court of Queen's Bench of Alberta.
"DD&A" means depreciation, depletion and amortization.
"Devon" means Devon Energy Corporation, a corporation organized and
existing under the laws of the State of Oklahoma, and includes any successor
corporation.
"Devon Affiliate" means each affiliate (as such term is defined for
purposes of the SEC Accounting Series Releases 130 and 135 and Rule 145 under
the Securities Act) of Devon.
"Devon Affiliates' Agreements" means the affiliates' agreements executed by
each Devon Affiliate and agreed to and accepted by Devon and Northstar.
"Devon Amended and Restated Certificate" means the Devon Certificate of
Incorporation, as amended, as proposed to be further amended and restated in
connection with the Combination Agreement, a copy of which is attached hereto as
Annex D.
"Devon Board" means the board of directors of Devon and any committee
thereof acting within its authority.
"Devon Common Stock" means the common stock, par value $0.10 per share, of
Devon.
"Devon Liquidation Event" means: (i) any determination by the Devon Board
to institute voluntary liquidation, dissolution, or winding-up proceedings with
respect to Devon or to effect any other distribution of assets of Devon among
its stockholders for the purpose of winding-up its affairs; or (ii) the earlier
of: (A) receipt by Devon of notice of; and (B) Devon's otherwise becoming aware
of, any threatened or instituted claim, suit, petition or other proceeding, with
respect to the involuntary liquidation, dissolution or winding-up of Devon or to
effect any other distribution of assets of Devon among its stockholders for the
purpose of winding-up its affairs.
"Devon Meeting" means the special meeting of Devon Stockholders to be held
with respect to, among other things, approval by the Devon Stockholders of the
Combination Agreement and the Combination, the Certificate Amendment and the
Option Plan Amendment.
"Devon Record Date" means October 27, 1998.
"Devon Reserve Reports" means the annual reports of estimated proved oil
and gas reserves of Devon as of December 31, 1997, prepared in accordance with
the rules and regulations of the SEC. Approximately 92% of Devon's U.S. proved
reserves were estimated by LaRoche Petroleum Consultants Ltd., independent
petroleum engineers. Devon's remaining U.S. proved reserves were estimated by
Devon's internal staff of engineers. All of Devon's Canadian proved reserves
were estimated by AMH Group Ltd., independent petroleum consultants.
"Devon Stock Option Plan" means the Devon Energy Corporation 1997 Stock
Option Plan as adopted by the Devon Stockholders on May 21, 1997.
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"Devon Stockholder Agreements" means the agreements among Devon, Northstar
and certain holders of shares of Devon Common Stock pursuant to which such
shareholders have agreed to vote in favor of the Combination.
"Devon Stockholders" means the holders of shares of Devon Common Stock.
"Dividend Amount" means, with respect to the Exchangeable Shares at a
particular time: (i) the amount of all declared, payable and unpaid, and all
undeclared but payable, cash dividends; and (ii) such stock or other property
constituting any declared, payable and unpaid, and all undeclared but payable,
non-cash dividends, collectively.
"Effective Date" means the date shown on the certificate of amendment
issued by the Registrar under the ABCA giving effect to the Arrangement.
"Effective Time" means 12:01 a.m. (Calgary time) on the Effective Date.
"Exchange Act" means the United States Securities Exchange Act of 1934, as
amended, and the rules and regulations promulgated thereunder.
"Exchange Put Right" means the right granted pursuant to the Exchangeable
Share Provisions and to the Trustee for the benefit of holders of the
Exchangeable Shares pursuant to the Voting and Exchange Trust Agreement to
require Devon to purchase all or any part of the Exchangeable Shares of the
holders at any time and to issue in exchange therefor shares of Devon Common
Stock, plus the Dividend Amount, if any.
"Exchange Ratio" means, subject to the Exchange Ratio Adjustment, 0.227:1,
such that each Northstar Common Share is exchanged for 0.227 Exchangeable
Shares.
"Exchange Ratio Adjustment" means the adjustment to be made to the Exchange
Ratio as follows: if the Pre-Meeting Average Price multiplied by 0.227 shall be
less than Cdn. $11.00, the Exchange Ratio shall be adjusted to the lesser of:
(i) 0.235; or (ii) the number obtained by dividing Cdn. $11.00 by the
Pre-Meeting Average Price.
"Exchange Rights" means the Exchange Put Right, the Automatic Exchange
Right and the Optional Exchange Right.
"Exchangeable Share Provisions" means the rights, privileges, restrictions
and conditions attaching to the Exchangeable Shares.
"Exchangeable Shares" means the exchangeable shares of Northstar provided
for in the Plan of Arrangement.
"Final Order" means the final order of the Court approving the Arrangement.
"Interim Order" means the interim order of the Court dated October 30,
1998, a copy of which is attached hereto as Annex C.
"Investment Canada Act" means the Investment Canada Act (Canada), as
amended.
"Joint Proxy Statement" means this Joint Management Information Circular
and Proxy Statement relating to the Northstar Meeting and the Devon Meeting.
"Liquidation Call Purchase Price" means the number of shares of Devon
Common Stock, plus the Dividend Amount, if any, applicable on the last Business
Date prior to the Liquidation Date.
"Liquidation Call Right" means the overriding right of Devon, in the event
of and notwithstanding the proposed liquidation, dissolution or winding-up or
any other distribution of assets of Northstar among its shareholders for the
purpose of winding-up its affairs, to purchase from all but not less than all of
the holders (other than Devon and any Subsidiary thereof) of Exchangeable Shares
on the Liquidation Date all but not less than all of the Exchangeable Shares
held by such holders in exchange for shares of Devon Common Stock, plus the
Dividend Amount, if any.
"Liquidation Date" means the effective date of any liquidation, dissolution
or winding-up of Northstar.
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"Material Adverse Effect" means, with respect to Devon or Northstar, any
event, change or effect that: (i) is materially adverse to the financial
condition, properties, or business of such party and its subsidiaries, taken as
a whole; and (ii) in the opinion of the board of directors of the other party
could reasonably be expected to reduce the market price or value of the party's
common shares or common stock, as the case may be, by more than 10%; provided
that, a Material Adverse Effect shall not include any decline in crude oil or
natural gas prices, any change in U.S. or Canadian dollar currency valuations or
exchange rates or any adverse effect resulting from changes in general economic
conditions or conditions generally affecting the industries in which Devon or
Northstar operate.
"ME" means the Montreal Exchange.
"Measurement Period" means the period of 10 consecutive trading days ending
on the second trading day prior to the first to occur of the date of the Devon
Meeting or the Northstar Meeting.
"Merrill Lynch" means Merrill Lynch, Pierce, Fenner & Smith Incorporated,
the provider of the Merrill Lynch Opinion.
"Merrill Lynch Opinion" means the oral opinion of Merrill Lynch rendered to
the Devon Board, which was subsequently confirmed in writing by letter dated
June 29, 1998.
"Morgan Stanley" means Morgan Stanley & Co. Incorporated, financial advisor
to Northstar in connection with the Combination and provider of the Morgan
Stanley Opinion.
"Morgan Stanley Opinion" means the oral opinion of Morgan Stanley rendered
to the Northstar Board, which was subsequently confirmed in writing by letter
dated June 29, 1998.
"Morrison" means Morrison Petroleums Ltd.
"noon buying rate" means the noon buying rate in the City of New York for
cable transfers in Canadian dollars as certified for customs purposes by the
Federal Reserve Bank of New York.
"Northstar" means Northstar Energy Corporation, a corporation organized and
existing under the ABCA, and includes any successor corporation.
"Northstar Affiliate" means each affiliate (as such term is defined for
purposes of SEC Accounting Series Releases 130 and 135 and pursuant to Rule 145
under the Securities Act) of Northstar.
"Northstar Affiliates' Agreements" means the affiliates' agreements
executed by each Northstar Affiliate and agreed to and accepted by Devon and
Northstar.
"Northstar Articles" means the Northstar articles of amalgamation as
proposed to be amended in connection with the Arrangement.
"Northstar Board" means the board of directors of Northstar and any
committee thereof acting within its authority.
"Northstar Bylaws" means Northstar's bylaws, as amended from time to time.
"Northstar Common Shares" means the common shares of Northstar.
"Northstar Insolvency Event" means the institution by Northstar of any
proceeding to be adjudicated as bankrupt or insolvent or to be dissolved or
wound-up, or the consent of Northstar to the institution of bankruptcy,
insolvency, dissolution or winding-up proceedings against it, or the filing of a
petition, answer or consent seeking dissolution or winding-up under any
bankruptcy, insolvency or analogous laws, including without limitation the
Companies Creditors' Arrangement Act (Canada) and the Bankruptcy and Insolvency
Act (Canada), and the failure by Northstar to contest in good faith any such
proceedings commenced in respect of Northstar within 15 days of becoming aware
thereof, or the consent of Northstar to the filing of any such petition or to
the appointment of a receiver, or the making by Northstar of a general
assignment for the benefit of creditors, or the admission in writing by
Northstar of its inability to pay its debts generally as they become due, or
Northstar's not being permitted, pursuant to liquidity or solvency requirements
of applicable law, to redeem any Exchangeable Shares pursuant to a Retraction
Request.
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<PAGE> 38
"Northstar Letter of Transmittal" means the letter delivered to Northstar
Shareholders with this Joint Proxy Statement, which when duly completed and
returned with a certificate for Northstar Common Shares prior to the tenth
anniversary of the Effective Date, will enable such Northstar Shareholder to
exchange such certificate for Exchangeable Shares or, if elected, for Devon
Common Stock pursuant to an election under the Exchange Put Right.
"Northstar Meeting" means the special meeting of Northstar Shareholders and
Northstar Optionholders to be held with respect to, among other things, the
approval by Northstar Shareholders and Northstar Optionholders of the
Arrangement.
"Northstar Option Plan" means the Stock Option Plan of Northstar, restated
and amended as of June 3, 1997.
"Northstar Optionholders" means the holders of Northstar Options.
"Northstar Options" means all outstanding options to purchase Northstar
Common Shares granted under the Northstar Option Plan and pursuant to certain
option agreements assumed by Northstar.
"Northstar Record Date" means October 27, 1998.
"Northstar Reserve Reports" means the annual reports of estimated proved
and probable oil and gas reserves of Northstar as of December 31, 1997. The
reserve report which relates to the properties held by Northstar prior to March,
1997 was prepared by John P. Hunter & Associates Ltd., independent petroleum
engineering consultants. The reserve reports which relate to properties acquired
directly or indirectly by Northstar in March, 1997 and subsequent to that date
were prepared by Paddock Lindstrom & Associates Ltd., independent petroleum
engineering consultants.
"Northstar Shareholder Agreements" mean the agreements among Northstar,
Devon and certain shareholders of Northstar pursuant to which such shareholders
have agreed to vote in favor of the Combination.
"Northstar Shareholders" means the holders of Northstar Common Shares.
"OGCA" means the Oklahoma General Corporation Act, as amended.
"Option Plan Amendment" means Devon's proposal to amend the Devon Stock
Option Plan to increase the number of shares available for grant under such
plan.
"Optional Exchange Right" means the right granted pursuant to the
Exchangeable Share Provisions and to the Trustee for the use and benefit of the
holders of the Exchangeable Shares pursuant to the Voting and Exchange Trust
Agreement to require Devon to purchase from any holder all or any part of the
Exchangeable Shares of such holder and to issue in exchange therefor shares of
Devon Common Stock, plus the Dividend Amount, if any, upon the occurrence of a
Northstar Insolvency Event.
"Plan of Arrangement" means the plan of arrangement proposed under section
186 of the ABCA substantially in the form attached hereto as Annex E, as
amended, modified or supplemented from time to time in accordance with its
terms.
"Pre-Meeting Average Price" means the weighted average trading price of
shares of Devon Common Stock on the AMEX (as reported by the AMEX and converted,
as herein provided, to Canadian dollars and expressed to the fourth decimal
place) during the Measurement Period. For this purpose, the U.S. dollar/
Canadian dollar exchange rate for determining the Pre-Meeting Average Price
shall be based upon the average of the noon buying rate (expressed to the fourth
decimal place) for each of the trading days in the Measurement Period, as
reported by the Federal Reserve Bank of New York. For this purpose, "weighted
average trading price" shall be determined by dividing the aggregate sale price
of all shares of Devon Common Stock sold on the AMEX during the Measurement
Period by the total number of shares of Devon Common Stock sold.
"RBC DS" means RBC Dominion Securities Inc., financial advisor to Northstar
in connection with the Combination and provider of the RBC DS Opinion.
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"RBC DS Opinion" means the oral opinion of RBC DS rendered to the Northstar
Board, which was subsequently confirmed in writing by letter dated June 29,
1998.
"Redemption Call Purchase Price" means the number of shares of Devon Common
Stock, plus the Dividend Amount, if any, applicable on the last Business Day
prior to the Automatic Redemption Date.
"Redemption Call Right" means the overriding right of Devon,
notwithstanding the proposed redemption of the Exchangeable Shares by Northstar
pursuant to the Exchangeable Share Provisions, to purchase from all but not less
than all of the holders (other than Devon or any Subsidiary thereof) of
Exchangeable Shares on the Automatic Redemption Date all but not less than all
of the Exchangeable Shares held by such holders in exchange for shares of Devon
Common Stock, plus the Dividend Amount, if any.
"Retraction Call Right" means the overriding right of Devon, in the event
of a proposed retraction of Exchangeable Shares by a holder thereof, to purchase
from such holder on the Retraction Date all but not less than all of the
Exchangeable Shares tendered for retraction by such holder in exchange for
shares of Devon Common Stock, plus the Dividend Amount, if any.
"Retraction Date" means a date, determined by a holder of Exchangeable
Shares, on which such holder can effect a retraction of such Exchangeable Shares
as further set out in the Exchangeable Share Provisions and described in "The
Combination -- Combination Mechanics and Description of Exchangeable Shares --
Exchange and Redemption Rights."
"Retraction Request" means a duly executed statement prepared by a holder
of Exchangeable Shares in the form of Schedule "A" to the Exchangeable Share
Provisions, a copy of which is attached hereto as Annex E, or in such other form
as may be acceptable to Northstar.
"Rights Agreement" means the Rights Agreement dated as of April 17, 1995,
as amended, between Devon and the First National Bank of Boston.
"SEC" means the United States Securities and Exchange Commission.
"Securities Act" means the United States Securities Act of 1933, as
amended, and the rules and regulations promulgated thereunder.
"Special Voting Stock" means the special voting capital stock, par value
$.10 per share, of Devon.
"Subsidiary", in relation to any person, means any body corporate,
partnership, joint venture, association or other entity of which more than 50%
of the total voting power of shares of stock or units of ownership or beneficial
interest entitled to vote in the election of directors (or members of a
comparable governing body) is owned or controlled, directly or indirectly, by
such person.
"Support Agreement" means the support agreement to be entered into as of
the Effective Date between Devon and Northstar, substantially in the form of
Annex F hereto.
"Trustee" means CIBC Mellon Trust Company, or any successor thereto, in any
of its capacities as Trustee under the Voting and Exchange Trust Agreement,
transfer agent for the Exchangeable Shares and Canadian co-registrar for Devon
Common Stock.
"TSE" means The Toronto Stock Exchange.
"U.S. Code" means the United States Internal Revenue Code of 1986, as
amended.
"U.S. dollars", "U.S.$" or "$" means United States dollars.
"U.S. GAAP" means generally accepted accounting principles in the United
States.
"Voting and Exchange Trust Agreement" means the voting and exchange trust
agreement to be entered into as of the Effective Date among Devon, Northstar and
the Trustee, substantially in the form of Annex G hereto.
"Voting Rights" means the rights of the holders of Exchangeable Shares to
direct the voting of the Voting Share in accordance with the Voting and Exchange
Trust Agreement.
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"Voting Share" means the one share of Devon Special Voting Stock to be
issued by Devon and deposited with the Trustee pursuant to the Voting and
Exchange Trust Agreement.
Oil and gas definitions.
"Bbl" means barrel.
"Bbl/d" means Bbl per day.
"Bcf" means billion cubic feet.
"Boe" means equivalent barrels of oil, calculated by converting gas to
equivalent Bbls. The U.S. convention for such conversion is six Mcf equals one
Boe. The Canadian convention for this conversion is ten Mcf equals one Boe.
"Boe/d" means Boe per day.
"MBbls" means thousand barrels.
"MBoe" means thousand Boe.
"Mcf" means thousand cubic feet.
"Mcfe" means thousand equivalent cubic feet of gas, calculated by
converting oil and NGLs to equivalent Mcf. The U.S. convention for such
conversion is one-sixth Bbl equals one Mcfe. The Canadian convention for this
conversion is one-tenth Bbl equals one Mcfe.
"MMBbls" means million barrels.
"MMBoe" means million Boe.
"MMBtu" means million British thermal units, a measure of heating value.
"MMcf" means million cubic feet.
"MMcf/d" means MMcf per day.
"NGLs" means natural gas liquids.
"Oil" includes crude oil and condensate.
"Tcf" means trillion cubic feet.
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RISK FACTORS
The following risk factors should be considered by Devon Stockholders and
Northstar Shareholders and Northstar Optionholders in evaluating whether to
approve the Combination. Some of these risk factors relate directly to the
Combination, while others are present in Devon's or Northstar's general business
environment independent of the Combination. These risk factors should be
considered in conjunction with the other information included in this Joint
Proxy Statement.
MARKET CONDITIONS AND VOLATILITY OF OIL AND GAS PRICES
The revenues generated by and the profitability of both Devon and Northstar
are highly dependent upon the prices of oil and gas. Oil and gas prices and
activity have been characterized by significant volatility over the last twenty
years. Since 1986, posted oil prices (West Texas Intermediate) have ranged from
a low of approximately $9.25 per barrel in 1998 (through July) to a high of
approximately $30 per barrel in 1991; and spot gas prices (Henry Hub) have
ranged from lows of approximately $1.00 per Mcf in 1992 to highs above $4.00 per
Mcf in 1997. The spot gas price (Henry Hub) at June 30, 1998 was $2.38 per Mcf.
From December 31, 1997 to June 30, 1998, the Texas Gulf Coast gas price
decreased approximately 17% and the price of West Texas Intermediate crude oil
decreased approximately 26%. Extended periods of low prices for either oil or
gas could affect both Devon's and Northstar's ability or willingness to continue
or complete their planned drilling programs. A delay or cancellation of future
drilling and development projects may, in turn, result in downward adjustments
to estimated reserves and/or have a material adverse impact on future net
revenues and profitability.
In addition, when oil or natural gas prices become unacceptably low, either
Devon or Northstar may elect to curtail production in various areas. For
example, during portions of 1991, Devon curtailed production from one of its
largest properties, the Northeast Blanco Unit in northwest New Mexico. Extended
or wide-spread curtailment of production as a result of low prices could have a
material adverse impact on revenues and profitability.
No assurance can be given as to the future price levels of oil and gas or
the volatility thereof or that the future price of oil and gas will be
sufficient to support current levels of exploration and production-related
activities.
NO ASSURANCE OF SUCCESSFUL COMBINATION OF DEVON AND NORTHSTAR
Devon and Northstar believe that the Combination has the potential to
produce a combined company that would be better able to grow than is presently
expected to be experienced by either company in the absence of the Combination.
There can be no assurance, however, that these benefits will be achieved or that
the results of the combined operations will be improved. These anticipated
benefits of the Combination will not be achieved unless the companies are
successfully combined in a timely manner. The process of combining the
organizations could cause the interruption of, or a loss of momentum in, the
activities of some or all of the companies' businesses, which could have an
adverse effect on their combined operations.
The success of the Combination will be partially dependent on the
integration of the current management and operations of Devon and Northstar.
Pursuant to employment contracts between Northstar and each of its six executive
officers, other than John A. Hagg, each of these executive officers may
terminate their employment contracts within six months of the Effective Date and
receive lump sum payments. See "The Combination -- Interests of Certain Persons
in the Combination -- Rights on Change of Control." Devon has had discussions
with all of the senior executives of Northstar. All but one of such officers
have indicated that they intend to remain at Northstar. Northstar's Chief
Financial Officer, John Richels, has indicated that he will leave Northstar
after the Effective Date to return to the practice of law. There can be no
assurances that Devon and Northstar will be able to effectively integrate
management and operations or that operational or administrative efficiencies
from the Combination will be attained.
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HIGHLY COMPETITIVE INDUSTRY
The oil and gas business is highly competitive. Both Devon and Northstar
encounter competition by major integrated and independent oil and gas companies
in marketing products, acquiring properties, contracting for drilling equipment
and securing trained personnel. Many competitors have resources that
substantially exceed those of either Devon or Northstar or both companies
combined.
UNCERTAINTY IN ESTIMATED RESERVES AND FUTURE NET REVENUES
Estimates of Devon's and Northstar's proved reserves and future net
revenues included or incorporated by reference herein are based on engineering
reports prepared by independent petroleum engineers. There are numerous
uncertainties inherent in estimating quantities and values of oil and gas
reserves and in projecting future rates of production and net revenues and the
timing of development expenditures, including uncertainties relating to
reservoir engineering, pricing and both operating and regulatory constraints. In
addition, certain events, including production, purchases and sales of
properties, results of future drilling and changes in planned drilling and
development could result in increases or decreases of estimated reserve
quantities or estimates of future net revenues. The estimates of future net
revenues included or incorporated by reference herein reflect oil and gas prices
as of the date of the relevant reserve report. However, there can be no
assurance that the prices used to estimate future net revenue will be realized.
In addition, reserve estimates are often different from the quantities of
natural gas and oil ultimately recovered. Any downward adjustment in their
respective reserve estimates could adversely affect either Devon's or
Northstar's future prospects and the market value of their respective
securities.
The proved reserve estimates of Devon and Northstar described in this Joint
Proxy Statement were calculated using oil and gas prices at December 31, 1997,
held constant over the economic life of the properties. From December 31, 1997
to August 31, 1998, the price of West Texas intermediate crude oil decreased
approximately 33% and the Texas Gulf Coast gas price decreased approximately
21%. If the total proved reserve estimates reported by Devon and Northstar
described elsewhere herein as of December 31, 1997 were calculated using oil and
gas prices as of August 31, 1998, held constant over the economic life of the
properties, the aggregate reserve estimates would have decreased by
approximately 4% from the proved reserve estimates reported herein.
RISKS OF THE OIL AND GAS BUSINESS
Devon's and Northstar's prospects for growth and profitability depend upon
their ability to replace both present reserves and production through
exploration, development and acquisitions. Without successful acquisition and/or
drilling activities, either company's proved reserves will decline as oil and
gas are produced. There can be no assurance that either company's exploration,
development and acquisition activities will result in significant additional
reserves or that either company will continue to be able to drill, complete and
operate productive wells at acceptable costs. Both Devon's and Northstar's
operations are also subject to various risks and uncertainties relating to
producing and selling oil and gas. Drilling may be curtailed, delayed or
canceled as a result of many factors, including title problems, inability to
obtain required drilling permits, weather conditions, shortages of experienced
labor, shortages of or delays in delivery of equipment, as well as the financial
instability of well operators, major working interest owners and well servicing
companies. The availability of a ready market for oil and gas depends on
numerous factors beyond either company's control, including the demand for and
supply of oil and gas, the proximity of natural gas reserves to pipelines, the
capacity of such pipelines, fluctuation in seasonal demand and the effects of
inclement weather and government regulation. New gas wells may be shut in for
lack of a market until a gas pipeline or gathering system with available
capacity is extended into that area.
DEPENDENCE ON THIRD PARTIES
In accordance with customary industry practice, Devon and Northstar rely on
independent third party service providers to provide most of the services
necessary to drill new wells, including drilling rigs and related equipment and
services, trucking services, tubulars, fracing and completion services and
production equip-
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ment. The industry has experienced significant price increases for these
services during the last year and this trend may continue into the future. These
cost increases could in the future significantly increase Devon's and
Northstar's development costs, decrease the return possible from drilling and
development activities, and possibly render the development of certain proved
undeveloped reserves uneconomical.
FINANCIAL REPORTING IMPACT OF OIL AND GAS ACCOUNTING
Both Devon and Northstar follow the full cost method of accounting for oil
and gas properties, although such methods are applied differently in the United
States and Canada. Under the full cost method in the United States, the
accounting method which will be used after the Combination, Devon's net book
value of its properties, less related deferred income taxes, may not exceed a
calculated "ceiling." The ceiling is the estimated after-tax future net revenues
from proved oil and gas properties, discounted at 10% per year. In calculating
future net revenues, prices and costs in effect at the time of the calculation
are held constant indefinitely, except for changes which are fixed and
determinable by existing contracts. The net book value is compared to the
ceiling on a quarterly and yearly basis. The excess, if any, of the net book
value above the ceiling is required to be written off as an expense. Under the
SEC's full cost accounting rules, any expense recorded as a result of the full
cost ceiling calculation may not be reversed even though higher oil and gas
prices may increase the ceiling applicable to future periods.
Devon's Full Cost Ceiling. At December 31, 1997, the excess of Devon's full
cost ceiling over the net book value of properties less deferred taxes, the full
cost "cushion," was approximately $146 million in the U.S. and $18 million in
Canada. From December 31, 1997 to September 30, 1998, the Texas Gulf Coast gas
price decreased approximately 35% and the price of West Texas Intermediate crude
oil decreased approximately 13%. As a result, at September 30, 1998, the net
book value of Devon's U.S. properties less deferred taxes exceeded the full cost
ceiling by approximately $88 million. Accordingly, the carrying value of Devon's
domestic oil and gas properties were reduced by $126.9 million in the third
quarter of 1998. This expense was partially offset by a deferred tax benefit of
$38.9 million, resulting in a net effect of $88 million. At September 30, 1998,
Devon's Canadian properties had a full cost "cushion" of approximately $4
million.
Northstar's Full Cost Ceiling -- Restated to the U.S. Full Cost Method of
Accounting. At December 31, 1997, the net book value of the Northstar properties
less deferred taxes, restated to the U.S. full cost method of accounting,
exceeded the full cost ceiling by approximately $398 million. Accordingly, a
$625 million "reduction in carrying value," partially offset by a $228 million
deferred tax benefit, will be included in the combined companies' financial
statements during 1997 if the Combination is completed. As of September 30,
1998, Northstar properties, restated to the U.S. full cost method of accounting,
and after giving effect to the December 31, 1997 reduction in carrying value,
had a full cost "cushion" of approximately $36 million.
There is no assurance that future price decreases will not result in
reductions in the carrying value of Devon's or Northstar's oil and gas
properties.
OPERATING HAZARDS AND UNINSURED RISKS
Devon and Northstar are subject to all risks normally incident to the
exploration for and production of oil and gas, including, but not limited to,
unintentional releases and discharges of oil, gas, brine or well fluids into the
environment, fires, pollution and other environmental risks. Any of these could
result in damage or destruction of oil and gas wells, formations or production
facilities or cause damage or injury to property and persons. Various federal,
state, provincial and local laws and regulations in the United States and Canada
covering the discharge of materials into the environment, or otherwise relating
to the protection of the environment or human health, may affect the operations
of Devon or Northstar and could subject either party to production curtailments
and/or additional expenses, including capital expenditures, for compliance or
liability for noncompliance. Although both Devon and Northstar carry insurance
which they believe is in accordance with customary industry practices, neither
company is fully insured against all risks. The occurrence of an event not fully
covered by insurance could have a material adverse effect on the financial
condition and operations of Devon, Northstar and the combined companies.
37
<PAGE> 44
IMPACT OF GOVERNMENTAL REGULATIONS
In late 1996, the Alberta Energy and Utilities Board (the "AEUB") conducted
a hearing to address the concerns of companies holding oil sands leases. The
holders of oil sands leases contend that recovery of bitumen from the oil sands
leases may be impaired by the extraction of natural gas which overlies bitumen
deposits if recovery of the bitumen does not occur first. In March 1998, the
AEUB issued guidelines to the oil and gas industry which granted holders of oil
and gas leases the right to continue to produce gas in oil sands areas from
wells drilled and completed by July 1, 1998, subject to the resolution of any
objections raised by holders of oil sands leases. After July 1, 1998,
application must be made to the AEUB before any recovery of either gas or
bitumen in oil sands areas is approved for a new well.
Although up to one-third of Northstar's existing gas production may be
subject to future objections by oil sands lease owners, only a modest portion
has been directly affected to date. Approximately 10 MMcf/d, or 5%, of
Northstar's existing gas production is from wells that may be subject to
curtailment if objections which have been filed from oil sands lease owners are
eventually upheld by the AEUB. Additionally, approximately 40% of Northstar's
undeveloped acreage is located in oil sands areas which are subject to the new
guidelines. If Northstar were to discover commercial quantities of gas in those
areas in the future, Northstar would need the approval of the AEUB to commence
production. As the AEUB guidelines are relatively recent, the practical
application and administration of the guidelines are now being developed. In
addition, further data is being collected which may cause a reduction in the
size of the oil sands area affected by the AEUB guidelines. Therefore, the
extent to which the AEUB final rules and administrative processes could affect
Northstar's future drilling plans and production from this area cannot yet be
determined.
Many other aspects of Devon's and Northstar's operations are affected by
political developments and are subject to both United States and Canadian
governmental regulation, including those relating to the development,
production, marketing and transmission of oil and gas as well as safety matters
and the protection of the environment. In addition, Devon and Northstar each
depend on the service industry and, therefore, are affected by any changes in
taxation, price controls or other laws and regulations that affect the service
industry generally. The adoption of laws and regulations curtailing exploration
for or production of oil and gas for economic or other policy reasons could
adversely affect Devon's or Northstar's operations. Devon and Northstar cannot
determine the extent to which their future operations and earnings may be
affected by new legislation, new regulations or changes in existing regulations.
IMPACT OF ENVIRONMENTAL REGULATIONS
Devon's and Northstar's operations and those of their customers are
affected by numerous federal, state, provincial and local environmental laws and
regulations in the United States and Canada. The technical requirements of these
laws and regulations are becoming increasingly expensive, complex and stringent.
These laws may impose penalties or sanctions for damages to natural resources or
threats to public health and safety. Such laws and regulations may also expose
each of Devon and Northstar to liability for the conduct of or conditions caused
by others, or for acts of Devon and Northstar that were in compliance with all
applicable laws at the time such acts were performed. Sanctions for
noncompliance may include revocation of permits, corrective action orders,
administrative or civil penalties and criminal prosecution. Certain
environmental laws provide for joint and several liability for remediation of
spills and releases of hazardous substances. In addition, both companies may be
subject to claims alleging personal injury or property damage as a result of
alleged exposure to hazardous substances, as well as damage to natural
resources.
POTENTIAL CHANGE IN EXCHANGE RATIO
The Exchange Ratio is subject to adjustment if the Pre-Meeting Average
Price of Devon Common Stock multiplied by 0.227 is less than Cdn. $11.00 during
the Measurement Period and may be adjusted pursuant to the Exchange Ratio
Adjustment to a maximum of 0.235. If an Exchange Ratio Adjustment is made,
additional Devon Common Stock will be issuable to Northstar Shareholders and
Northstar Optionholders, resulting in the existing Devon Stockholders owning a
slightly smaller percentage of the total shares outstanding after the
Combination than if no Exchange Ratio Adjustment had been made.
38
<PAGE> 45
POTENTIAL CONFLICT OF INTEREST
Kerr-McGee Corporation ("Kerr-McGee") currently owns 9,954,000 shares, or
31%, of the outstanding Devon Common Stock. After completion of the Combination
and assuming a 0.227 Exchange Ratio and the exchange of all Exchangeable Shares
for shares of Devon Common Stock, Kerr-McGee would own 21% of the outstanding
shares of Devon Common Stock. Devon and Kerr-McGee have entered into a Stock
Rights and Restrictions Agreement dated as of December 31, 1996 which gives
Kerr-McGee certain rights, including the right to representation on the Devon
Board proportionate to its percentage ownership of Devon Common Stock
outstanding. Kerr-McGee currently has three representatives on the Devon Board.
As a result of its ownership and board representation, Kerr-McGee may have the
power to substantially influence the outcome of matters submitted to a vote of
the Devon Board and/or Devon Stockholders, and Kerr-McGee's interests may not
reflect the interests of other stockholders. Kerr-McGee has signed a Stockholder
Agreement, agreeing to vote all of its shares of Devon Common Stock in favor of
the Combination Agreement and the Combination and the Certificate Amendment.
Devon and Kerr-McGee have not implemented any specific procedures to deal with
conflicts that may arise in the future between Kerr-McGee's interests and those
of other Devon Stockholders. In the event such a conflict arises, Devon will
implement procedures it deems appropriate to deal with the specific situation.
CHANGE IN PROPERTY CONCENTRATION
As of December 31, 1997, 100% of Northstar's oil and gas reserves were
located in Canada and 91% of Devon's oil and gas reserves were located in the
United States. After the Combination, about 54% of the reserves of the combined
companies will be in the United States and 46% will be in Canada. Thus, future
results of the combined companies will be proportionately more dependent upon
the future economic conditions in Canada than Devon was prior to the
Combination, and proportionately more dependent upon economic conditions in the
United States than Northstar was prior to the Combination.
POTENTIALLY ADVERSE U.S. INCOME TAX CONSEQUENCES TO NORTHSTAR SHAREHOLDERS
It is more likely than not that the Arrangement will qualify as a
"reorganization" within the meaning of Section 368(a) of the U.S. Code with
respect to United States Holders (as defined under "Income Tax Considerations to
Northstar Shareholders and Optionholders -- United States Federal Income Tax
Considerations to Northstar Shareholders") of Northstar Common Shares who
receive Exchangeable Shares pursuant to the Arrangement. There is, however, no
direct authority addressing the proper treatment of the Arrangement for United
States federal income tax purposes and, therefore, such conclusion is subject to
significant uncertainty. If the Arrangement fails to qualify as a
reorganization, a United States Holder of the Northstar Common Shares who
receives Exchangeable Shares pursuant to the Arrangement would recognize a gain
or loss equal to the difference between the fair market value of the
Exchangeable Shares received and such holder's tax basis in the Northstar Common
Shares exchanged therefor. See "Income Tax Considerations to Northstar
Shareholders and Optionholders -- United States Federal Income Tax
Considerations to Northstar Shareholders."
Northstar intends to withhold applicable Canadian withholding taxes from
dividends paid on the Exchangeable Shares to non-Canadian recipients. In
addition, Northstar and Devon intend to treat dividends received by a non-United
States resident holder with respect to the Exchangeable Shares as dividends from
Northstar rather than from Devon and as not subject to United States withholding
tax, and Northstar and Devon do not intend to withhold any amounts for U.S.
federal income taxes from dividends paid to non-United States holders. There is
some possibility, however, that the Internal Revenue Service may assert that
United States withholding tax is payable with respect to any dividends paid on
the Exchangeable Shares to non-United States Holders. See "Income Tax
Considerations to Northstar Shareholders and Optionholders."
ADVERSE TAX CONSEQUENCES OF AUTOMATIC REDEMPTION
As discussed above, the Combination has been structured to provide the
opportunity for a tax deferral to most resident Canadian Northstar Shareholders
who receive Exchangeable Shares pursuant to the Arrange-
39
<PAGE> 46
ment. In addition, it is more likely than not that most United States Holders
(as defined under "Income Tax Considerations to Northstar Shareholders and
Optionholders -- United States Federal Income Tax Considerations to Northstar
Shareholders") of Northstar Common Shares who receive Exchangeable Shares
pursuant to the Arrangement will have the opportunity for a tax deferral.
However, shareholders will generally only be able to obtain a tax deferral for
as long as they hold the Exchangeable Shares, and will, except in certain
limited situations, recognize a gain or loss upon the exchange of their
Exchangeable Shares for shares of Devon Common Stock. An automatic redemption of
the Exchangeable Shares for shares of Devon Common Stock may occur at any time
after the Effective Date if an Automatic Redemption Date occurs. An Automatic
Redemption Date will occur no later than the tenth anniversary of the Effective
Date. See "Northstar Share Capital" and "Income Tax Considerations to Northstar
Shareholders and Optionholders."
ANTI-TAKEOVER PROVISIONS
Certain provisions of Devon's Certificate of Incorporation and Bylaws and
of the OGCA, as well as Devon's Rights Agreement, may make it more difficult for
Devon Stockholders to cause a change in control of Devon and replace incumbent
management than it would be for Northstar Shareholders to cause a change in
control of Northstar and replace incumbent management. See "Comparison of
Stockholder Rights -- Anti-Takeover Provisions and Interested Stockholder
Transactions."
HEDGING AND FIXED PRICE CONTRACT RISKS
From time to time, Northstar, and to a lesser extent Devon, have entered
into hedging arrangements or certain types of fixed price or delivery contracts
relating to portions of their oil and gas production. These transactions have
involved fixed contracts and other arrangements at a variety of fixed prices and
with a variety of other provisions including price floors, ceilings and/or fixed
obligations to deliver oil, liquids or natural gas. Approximately 42.3 Bcf and
5.6 MMBbls of Northstar's 1998 production and approximately 28.8 Bcf and 3.0
MMBbls of Northstar's 1999 production are subject to such transactions. See
"Northstar Management's Discussion and Analysis of Financial Condition and
Results of Operations -- Financial Instruments and Commodity Contracts" for a
more complete description of Northstar's activities. Approximately 9.7 Bcf of
Devon's 1998 gas production and 9.6 Bcf of Devon's 1999 gas production are
subject to such transactions. Devon and Northstar may in the future enter into
similar or related contracts. The companies' hedging and contract activities,
while intended to reduce sensitivity to changes in the market prices of oil and
gas, are subject to a number of risks including instances in which: (i)
production is less than expected; (ii) there is a widening of price
differentials between delivery points required by fixed price delivery contracts
to the extent they differ from those on the companies' production; or (iii) the
companies' counterparties to its futures contracts will be unable to meet the
financial terms of the transaction. While the use of these arrangements limits
the risk of declines in oil and gas prices, it may limit the benefit to Devon
and Northstar of increases in the price of oil and gas.
40
<PAGE> 47
COMPARATIVE PER SHARE DATA
The following table presents historical per share data for Devon and
Northstar and pro forma per share data giving effect to the Combination on the
basis described in the notes to the pro forma combined financial statements
included elsewhere herein. The table should be read in conjunction with the
historical financial statements of Devon, which are included in Devon's Form
10-K for the year ended December 31, 1997, and Devon's Form 10-Q for the quarter
ended June 30, 1998, copies of which are included herewith. The table should
also be read in conjunction with the historical financial statements of
Northstar, and the unaudited pro forma combined financial statements, which
statements are included elsewhere herein. See "Devon-Northstar Unaudited Pro
Forma Combined Financial Information." The pro forma per share data are not
necessarily indicative of actual results had the Combination occurred on the
dates assumed or of future results.
<TABLE>
<CAPTION>
DEVON NORTHSTAR
------------------------- ----------------------------
EQUIVALENT
HISTORICAL PRO FORMA(1) HISTORICAL(2) PRO FORMA(3)
---------- ------------ ------------- ------------
<S> <C> <C> <C> <C>
Net earnings per share -- basic:
Six months ended June 30, 1998........... $ 0.55 $ 0.55 $ 0.13 $ 0.12
Six months ended June 30, 1997........... 1.25 1.20 0.25 0.27
Year ended December 31, 1997............. 2.34 (6.45) (5.95) (1.46)
Year ended December 31, 1996............. 1.57 2.08 0.72 0.47
Year ended December 31, 1995............. 0.66 (0.81) (0.91) (0.18)
Net earnings per share -- diluted:
Six months ended June 30, 1998........... 0.55 0.55 0.13 0.12
Six months ended June 30, 1997........... 1.15 1.13 0.25 0.26
Year ended December 31, 1997............. 2.17 (6.45) (5.95) (1.46)
Year ended December 31, 1996............. 1.52 2.01 0.72 0.46
Year ended December 31, 1995............. 0.65 (0.81) (0.91) (0.18)
Cash dividends per share:
Six months ended June 30, 1998........... 0.10 0.07 -- 0.02
Six months ended June 30, 1997........... 0.10 0.07 -- 0.02
Year ended December 31, 1997............. 0.20 0.14 -- 0.03
Year ended December 31, 1996............. 0.14 0.18 0.06(4) 0.04
Year ended December 31, 1995............. 0.12 0.16 0.06(4) 0.04
Book value per share:
As of June 30, 1998...................... 17.22 12.65 0.90 2.88
As of December 31, 1997.................. 16.82 12.49 0.78 2.84
</TABLE>
- ---------------
(1) Devon's pro forma data include the effect of the Combination on the basis
described in the notes to the pro forma combined financial statements
included elsewhere herein.
(2) Northstar's historical amounts presented above are converted to U.S. GAAP
and U.S. dollars. See "U.S. GAAP Financial Information -- Northstar"
included elsewhere herein for a description of the differences between
Northstar's financial results using Canadian GAAP and Canadian dollars and
those results using U.S. GAAP and U.S. dollars.
(3) Northstar's equivalent pro forma amounts have been calculated by multiplying
Devon's pro forma net earnings, cash dividends and book value per share
amounts by the Exchange Ratio of 0.227:1, so that Devon's pro forma per
share amounts are equated to the respective values of one share of Northstar
common stock.
(4) Dividends shown represent dividends paid by Morrison on its common shares.
On June 26, 1998, the last full trading day prior to the joint public
announcement by Devon and Northstar of the Combination, the last reported sales
price on the AMEX of Devon Common Stock was $36.50. The last reported sales
price of the Northstar Common Shares on the TSE on the same day was Cdn.$9.75 or
$6.64, assuming a conversion of C$1.00 to U.S.$0.68.
41
<PAGE> 48
REPORTING CURRENCIES AND ACCOUNTING PRINCIPLES
The consolidated financial statements of, and the summaries of historical
consolidated financial information concerning, Northstar contained in this Joint
Proxy Statement are reported in Canadian dollars and have been prepared in
accordance with Canadian GAAP, which differs in certain material respects from
U.S. GAAP. See Note 13 of Notes to Northstar's Consolidated Financial
Statements, which presents a reconciliation of such consolidated financial
statements from Canadian GAAP to U.S. GAAP. Also included in this Joint Proxy
Statement under the heading "Unaudited U.S. GAAP Financial Information --
Northstar" are financial statements of Northstar to which adjustments have been
made to convert such financial statements to U.S. GAAP and to conform such
financial statements to Devon's presentation. Such financial statements have
been converted to U.S. dollars using the period end exchange rate for each
balance sheet and the average of each month end exchange rate for such period
for each statement of operations. The historical exchange rates in effect for
each period are displayed in the table below.
The consolidated financial statements and the pro forma combined financial
statements of and the summaries of historical consolidated financial information
concerning Devon contained in this Joint Proxy Statement are reported in U.S.
dollars and have been prepared in accordance with U.S. GAAP.
IN THIS JOINT PROXY STATEMENT, UNLESS OTHERWISE INDICATED, ALL DOLLAR
AMOUNTS ARE EXPRESSED IN U.S. DOLLARS.
EXCHANGE RATE OF CANADIAN AND U.S. DOLLARS
The following table sets forth for the periods indicated certain exchange
rates based on the noon buying rate. Such rates are set forth as United States
dollars per Canadian $1.00 and are the inverse of rates quoted by the Federal
Reserve Bank of New York for Canadian dollars per U.S. $1.00.
<TABLE>
<CAPTION>
SIX MONTHS
ENDED JUNE 30, YEAR ENDED DECEMBER 31,
--------------- ------------------------------------------
1998 1997 1997 1996 1995 1994 1993
------ ------ ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C> <C>
Noon Buying Rate at end of period (U.S.
$)................................... 0.6795 0.7241 0.6999 0.7301 0.7323 0.7128 0.7544
Average Noon Buying Rate during period
(U.S. $)............................. 0.6951 0.7282 0.7221 0.7332 0.7286 0.7300 0.7729
Highest Noon Buying Rate during period
(U.S. $)............................. 0.7105 0.7487 0.7487 0.7513 0.7527 0.7632 0.8046
Lowest Noon Buying Rate during period
(U.S. $)............................. 0.6784 0.7145 0.6945 0.7235 0.7023 0.7103 0.7439
</TABLE>
On October 28, 1998, the noon buying rate was Canadian $1.00 = U.S.
$0.6503.
42
<PAGE> 49
COMPARATIVE MARKET PRICE DATA
The following table sets forth the high and low sales prices and trading
volumes of the shares of Devon Common Stock, traded under the symbol "DVN" on
the AMEX, and of the Northstar Common Shares, traded under the symbol "NEN" on
the TSE and ME, for the calendar quarters and months indicated. The quotations
and volumes are as reported in published financial sources.
<TABLE>
<CAPTION>
DEVON(1) NORTHSTAR(2)
--------------------------- ---------------------------------------------------------
AMEX TSE ME(3)
--------------------------- --------------------------- ---------------------------
HIGH LOW VOLUME(4) HIGH LOW VOLUME(4) HIGH LOW VOLUME(4)
------ ------ --------- ------ ------ --------- ------ ------ ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Quarter ended:
1996
March 31............................... $25.75 $19.88 2,825 $16.50 $13.50 5,308 -- -- --
June 30................................ $26.13 $22.00 2,474 $15.50 $13.00 5,079 -- -- --
September 30........................... $27.50 $22.75 4,715 $14.50 $11.60 7,069 -- -- --
December 31............................ $36.88 $25.25 6,011 $17.30 $11.65 10,934 -- -- --
1997
March 31............................... $38.88 $29.50 4,458 $17.00 $13.25 17,485 -- -- --
June 30................................ $38.50 $27.38 5,619 $14.10 $11.55 32,364 $13.85 $11.30 4,451
September 30........................... $45.25 $36.13 3,851 $13.00 $11.15 10,204 $13.00 $11.20 3,328
December 31............................ $49.13 $35.00 4,466 $12.50 $ 8.50 16,486 $12.20 $ 8.50 2,953
1998
March 31............................... $40.88 $33.00 5,543 $10.60 $ 7.60 22,163 $10.60 $ 8.15 1,409
Month ended:
April................................ $40.50 $36.06 1,705 $10.45 $ 9.25 3,473 $10.40 $ 9.20 98
May.................................. $40.38 $35.75 1,312 $ 9.25 $ 8.60 2,048 $ 9.75 $ 8.50 122
June................................. $37.94 $32.63 3,127 $11.35 $ 8.25 17,575 $11.25 $ 8.40 598
July................................. $36.63 $32.25 5,170 $11.70 $10.00 24,880 $11.65 $10.10 1,006
August............................... $32.31 $26.38 3,012 $10.70 $ 8.50 6,880 $10.60 $ 8.55 1,069
September............................ $34.00 $26.13 1,612 $11.10 $ 8.35 6,890 $11.05 $ 8.50 1,071
October (through October 28, 1998)... $34.00 $30.13 3,341 $11.40 $ 9.75 12,942 $11.40 $ 9.90 1,161
</TABLE>
- ---------------
(1) The prices set forth for shares of Devon Common Stock are in U.S. dollars.
(2) The prices set forth for Northstar Common Shares are in Canadian dollars.
(3) Northstar Common Shares commenced trading on the ME in April, 1997.
(4) In thousands.
On June 26, 1998, the last full trading day prior to the joint public
announcement by Devon and Northstar of the proposed Combination, the last
reported sales price on the AMEX of shares of Devon Common Stock was $36.50. The
last reported sales price of the Northstar Common Shares on the TSE on the same
day was Cdn. $9.75.
43
<PAGE> 50
DEVON-NORTHSTAR
UNAUDITED PRO FORMA COMBINED FINANCIAL INFORMATION
Set forth below is certain unaudited pro forma combined financial
information with respect to the Combination. Such information gives effect to
the Combination under the pooling-of-interests method of accounting under U.S.
GAAP. Accordingly, the unaudited pro forma combined balance sheet has been
presented as if Devon and Northstar were combined at the date of such pro forma
balance sheet. The unaudited pro forma combined statements of operations have
been presented as if Devon and Northstar were combined as of the beginning of
the earliest period presented.
The following unaudited pro forma combined financial statements should be
read in conjunction with the notes thereto immediately following such unaudited
pro forma combined financial statements, and the consolidated financial
statements and related notes of Devon included in Devon's Form 10-K for the year
ended December 31, 1997, and Devon's Form 10-Q for the quarter ended June 30,
1998, copies of which are included herewith. The following unaudited pro forma
combined financial statements should also be read in conjunction with the
consolidated financial statements and related notes of Northstar, which are
included elsewhere herein. The unaudited pro forma combined financial
information is presented for illustrative purposes only and is not necessarily
indicative of actual results of operations or financial position that would have
been achieved had the Combination been consummated at the beginning of the
earliest period presented. The unaudited pro forma combined financial
information is also not necessarily indicative of future results.
UNAUDITED PRO FORMA COMBINED BALANCE SHEET
JUNE 30, 1998
(IN THOUSANDS)
<TABLE>
<CAPTION>
COMBINATION DEVON-
RELATED NORTHSTAR
NORTHSTAR PRO FORMA PRO FORMA
DEVON U.S. GAAP(1) ADJUSTMENTS(2) COMBINED
-------- ------------ -------------- ----------
<S> <C> <C> <C> <C>
Assets:
Current assets......................... $ 69,926 $ 65,579 $(13,000)(a) $ 122,505
Property and equipment, net............ 780,175 265,764 1,045,939
Deferred income taxes.................. -- 55,820 (55,820)(b) --
Other assets, net...................... 13,056 45,209 58,265
-------- --------- -------- ----------
Total assets................... $863,157 $ 432,372 $(68,820) $1,226,709
======== ========= ======== ==========
Liabilities:
Current liabilities.................... $ 24,479 $ 60,757 $ 85,236
Revenues and royalties due to others... 2,926 8,241 11,167
Other liabilities...................... 23,766 -- 23,766
Long-term debt......................... -- 302,078 302,078
Deferred income taxes.................. 105,935 -- $(55,820)(b) 50,115
Company-obligated mandatorily
redeemable convertible preferred
securities of subsidiary trust
holding solely 6.5% convertible
junior subordinated debentures of
Devon Energy Corporation............ 149,500 -- 149,500
Stockholders' equity:
Preferred stock........................ -- -- --
Common stock........................... 3,232 -- 1,550(c) 4,782
Additional paid-in capital............. 392,937 396,030 (1,550)(c) 787,417
Retained earnings (deficit)............ 164,471 (316,649) (13,000)(a) (165,178)
Accumulated other comprehensive
earnings (loss) -- foreign currency
translation adjustments............. (4,089) (18,085) (22,174)
-------- --------- -------- ----------
Total stockholders' equity..... 556,551 61,296 (13,000) 604,847
-------- --------- -------- ----------
Total liabilities and
stockholders' equity......... $863,157 $ 432,372 $(68,820) $1,226,709
======== ========= ======== ==========
</TABLE>
See accompanying notes to unaudited pro forma combined financial statements.
44
<PAGE> 51
DEVON-NORTHSTAR
UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS
FOR THE SIX MONTHS ENDED JUNE 30, 1998
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
DEVON-
NORTHSTAR
NORTHSTAR PRO FORMA
DEVON U.S. GAAP(1) COMBINED
-------- ------------ ---------
<S> <C> <C> <C>
Revenues:
Oil sales................................................ $ 45,564 $30,009 $ 75,573
Gas sales................................................ 70,279 36,276 106,555
Natural gas liquids sales................................ 7,988 1,699 9,687
Other.................................................... 3,603 9,794 13,397(4)
-------- ------- --------
Total revenues................................... 127,434 77,778 205,212
-------- ------- --------
Costs and expenses:
Lease operating expenses................................. 37,112 20,567 57,679
Production taxes......................................... 6,539 727 7,266
Depreciation, depletion and amortization................. 45,024 16,134 61,158
General and administrative expenses...................... 6,740 5,044 11,784
Interest expense......................................... 51 10,786 10,837
Deferred effect of changes in foreign currency exchange
rate on long-term debt................................ -- 6,921 6,921
Distributions on preferred securities of subsidiary
trust................................................. 4,859 -- 4,859
-------- ------- --------
Total costs and expenses......................... 100,325 60,179 160,504
-------- ------- --------
Earnings before income taxes............................... 27,109 17,599 44,708
Income tax expense:
Current.................................................. 4,636 695 5,331
Deferred................................................. 4,717 8,262 12,979
-------- ------- --------
Total income tax expense......................... 9,353 8,957 18,310
-------- ------- --------
Net earnings............................................... $ 17,756 $ 8,642 $ 26,398
======== ======= ========
Net earnings per average common share outstanding:
Basic.................................................... $ 0.55 $ 0.55
Diluted.................................................. $ 0.55 $ 0.55
Weighted average common shares outstanding -- basic........ 32,320 47,794
</TABLE>
See accompanying notes to unaudited pro forma combined financial statements.
45
<PAGE> 52
DEVON-NORTHSTAR
UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS
FOR THE SIX MONTHS ENDED JUNE 30, 1997
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
DEVON-
NORTHSTAR
NORTHSTAR PRO FORMA
DEVON U.S. GAAP(1) COMBINED
-------- ------------ ---------
<S> <C> <C> <C>
Revenues:
Oil sales............................................. $ 69,590 $28,290 $ 97,880
Gas sales............................................. 73,414 24,891 98,305
Natural gas liquids sales............................. 11,328 2,136 13,464
Other................................................. 3,219 34,128 37,347(4)
-------- ------- --------
Total revenues................................ 157,551 89,445 246,996
-------- ------- --------
Costs and expenses:
Lease operating expenses.............................. 30,341 15,588 45,929
Production taxes...................................... 9,055 573 9,628
Depreciation, depletion and amortization.............. 40,142 29,479 69,621
General and administrative expenses................... 6,236 5,544 11,780
Interest expense...................................... 159 5,488 5,647
Deferred effect of changes in foreign currency
exchange rate on long-term debt.................... -- 266 266
Distributions on preferred securities of subsidiary
trust.............................................. 4,859 -- 4,859
-------- ------- --------
Total costs and expenses...................... 90,792 56,938 147,730
-------- ------- --------
Earnings before income taxes............................ 66,759 32,507 99,266
Income tax expense:
Current............................................... 8,545 781 9,326
Deferred.............................................. 18,158 14,526 32,684
-------- ------- --------
Total income tax expense...................... 26,703 15,307 42,010
-------- ------- --------
Net earnings............................................ $ 40,056 $17,200 $ 57,256
======== ======= ========
Net earnings per average common share outstanding:
Basic................................................. $ 1.25 $ 1.20
Diluted............................................... $ 1.15 $ 1.13
Weighted average common shares outstanding-basic........ 32,154 47,763
</TABLE>
See accompanying notes to unaudited pro forma combined financial statements.
46
<PAGE> 53
DEVON-NORTHSTAR
UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1997
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
DEVON-
NORTHSTAR
NORTHSTAR PRO FORMA
DEVON U.S. GAAP(1) COMBINED
-------- ------------ ---------
<S> <C> <C> <C>
Revenues:
Oil sales.............................................. $133,445 $ 74,280 $ 207,725
Gas sales.............................................. 150,549 68,910 219,459
Natural gas liquids sales.............................. 21,754 3,166 24,920
Other.................................................. 7,392 40,163 47,555(4)
-------- --------- ---------
Total revenues................................. 313,140 186,519 499,659
-------- --------- ---------
Costs and expenses:
Lease operating expenses............................... 65,655 35,242 100,897
Production taxes....................................... 17,924 1,303 19,227
Depreciation, depletion and amortization............... 85,307 83,801 169,108
General and administrative expenses.................... 12,922 11,459 24,381
Interest expense....................................... 274 18,514 18,788
Deferred effect of changes in foreign currency exchange
rate on long-term debt.............................. -- 5,860 5,860
Distributions on preferred securities of subsidiary
trust............................................... 9,717 -- 9,717
Reduction of carrying value of oil and gas
properties.......................................... -- 625,514 625,514
-------- --------- ---------
Total costs and expenses....................... 191,799 781,693 973,492
-------- --------- ---------
Earnings (loss) before income taxes...................... 121,341 (595,174) (473,833)
Income tax expense (benefit):
Current................................................ 25,202 1,655 26,857
Deferred............................................... 20,847 (221,546) (200,699)
-------- --------- ---------
Total income tax expense (benefit)............. 46,049 (219,891) (173,842)
-------- --------- ---------
Net earnings (loss)...................................... $ 75,292 $(375,283) $(299,991)
======== ========= =========
Net earnings (loss) per average common share outstanding:
Basic.................................................. $ 2.34 $ (6.45)
Diluted................................................ $ 2.17 $ (6.45)
Weighted average common shares outstanding -- basic...... 32,216 46,535
</TABLE>
See accompanying notes to unaudited pro forma combined financial statements.
47
<PAGE> 54
DEVON-NORTHSTAR
UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1996
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
DEVON-
NORTHSTAR
NORTHSTAR PRO FORMA
DEVON U.S. GAAP(1) COMBINED
-------- ------------ ---------
<S> <C> <C> <C>
Revenues:
Oil sales............................................. $ 80,142 $ 55,881 $136,023
Gas sales............................................. 68,049 33,394 101,443
Natural gas liquids sales............................. 14,367 4,932 19,299
Other................................................. 1,459 33,111 34,570(4)
-------- -------- --------
Total revenues................................ 164,017 127,318 291,335
-------- -------- --------
Costs and expenses:
Lease operating expenses.............................. 31,568 27,166 58,734
Production taxes...................................... 10,658 222 10,880
Depreciation, depletion and amortization.............. 43,361 26,946 70,307
General and administrative expenses................... 9,101 6,010 15,111
Interest expense...................................... 5,277 7,385 12,662
Deferred effect of changes in foreign currency
exchange rate on long-term debt.................... -- 199 199
Distributions on preferred securities of subsidiary
trust.............................................. 4,753 -- 4,753
-------- -------- --------
Total costs and expenses...................... 104,718 67,928 172,646
-------- -------- --------
Earnings before income taxes............................ 59,299 59,390 118,689
Income tax expense:
Current............................................... 6,709 1,125 7,834
Deferred.............................................. 17,789 25,463 43,252
-------- -------- --------
Total income tax expense...................... 24,498 26,588 51,086
-------- -------- --------
Net earnings............................................ $ 34,801 $ 32,802 $ 67,603
======== ======== ========
Net earnings per average common share outstanding:
Basic................................................. $ 1.57 $ 2.08
Diluted............................................... $ 1.52 $ 2.01
Weighted average common shares outstanding -- basic..... 22,160 32,449
</TABLE>
See accompanying notes to unaudited pro forma combined financial statements.
48
<PAGE> 55
DEVON-NORTHSTAR
UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1995
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
DEVON-
NORTHSTAR
NORTHSTAR PRO FORMA
DEVON U.S. GAAP(1) COMBINED
-------- ------------ ---------
<S> <C> <C> <C>
Revenues:
Oil sales............................................. $ 55,290 $ 60,316 $115,606
Gas sales............................................. 50,732 20,462 71,194
Natural gas liquids sales............................. 6,404 2,687 9,091
Other................................................. 877 13,375 14,252(4)
-------- -------- --------
Total revenues................................ 113,303 96,840 210,143
-------- -------- --------
Costs and expenses:
Lease operating expenses.............................. 27,289 24,435 51,724
Production taxes...................................... 6,832 220 7,052
Depreciation, depletion and amortization.............. 38,090 35,350 73,440
General and administrative expenses................... 8,419 6,487 14,906
Interest expense...................................... 7,051 3,834 10,885
Deferred effect of changes in foreign currency
exchange rate on long-term debt.................... -- 307 307
Reduction of carrying value of oil and gas
properties......................................... -- 97,061 97,061
-------- -------- --------
Total costs and expenses...................... 87,681 167,694 255,375
-------- -------- --------
Earnings (loss) before income taxes..................... 25,622 (70,854) (45,232)
Income tax expense (benefit):
Current............................................... 4,495 797 5,292
Deferred.............................................. 6,625 (31,256) (24,631)
-------- -------- --------
Total income tax expense (benefit)............ 11,120 (30,459) (19,339)
-------- -------- --------
Net earnings (loss)..................................... $ 14,502 $(40,395) $(25,893)
======== ======== ========
Net earnings (loss) per average common share
outstanding:
Basic................................................. $ 0.66 $ (0.81)
Diluted............................................... $ 0.65 $ (0.81)
Weighted average common shares outstanding -- basic..... 22,074 32,119
</TABLE>
See accompanying notes to unaudited pro forma combined financial statements.
49
<PAGE> 56
DEVON-NORTHSTAR
NOTES TO UNAUDITED PRO FORMA COMBINED
FINANCIAL STATEMENTS
JUNE 30, 1998 AND 1997, AND DECEMBER 31, 1997, 1996 AND 1995
1. BASIS OF PRESENTATION
The accompanying unaudited pro forma combined financial information is
presented to reflect the consummation of the Combination as described elsewhere
herein. The pro forma combined balance sheet and statements of operations are
presented under the pooling-of-interests method of accounting under U.S. GAAP.
Accordingly, the unaudited pro forma combined balance sheet has been presented
as if Devon and Northstar were combined at the date of such pro forma balance
sheet. The unaudited pro forma combined statements of operations have been
prepared as if Devon and Northstar were combined as of the beginning of the
earliest period presented.
The accompanying unaudited pro forma combined financial information has
been prepared based on estimates and assumptions deemed by Devon to be
appropriate and does not purport to be indicative of the financial position or
results of operations which would actually have been attained if the Combination
had been consummated as presented in such statements or which may be obtained in
the future. In addition, future results may vary significantly from the results
reflected in such statements due to normal oil and natural gas production
declines, changes in prices received for oil, gas and NGLs, future acquisitions
and other factors.
The unaudited pro forma combined financial information should be read in
conjunction with the historical consolidated financial statements and related
notes thereto for Devon included in Devon's Form 10-K for the year ended
December 31, 1997, and Devon's Form 10-Q for the quarter ended June 30, 1998,
copies of which are included herewith. The unaudited pro forma combined
financial information should also be read in conjunction with the historical
consolidated financial statements and related notes for Northstar which are
included elsewhere herein.
The historical consolidated financial statements for Northstar were
prepared under Canadian GAAP and in Canadian dollars. For these unaudited pro
forma combined financial statements, the historical financial information of
Northstar has been converted to U.S. dollars using the June 30, 1998, exchange
rate for the balance sheet and the average exchange rates for the six month
periods ended June 30, 1998 and 1997, and the years 1997, 1996 and 1995, for the
statements of operations. These unaudited pro forma financial statements also
present the historical Northstar financial statements under U.S. GAAP. See
"Unaudited U.S. GAAP Financial Information -- Northstar" for more complete
information on Northstar's U.S. GAAP financial data, including the adjustments
made to convert Northstar's historical data from Canadian GAAP and Canadian
dollars to U.S. GAAP and U.S. dollars. Also, see Note 13 to Northstar's
historical consolidated financial statements included elsewhere herein for a
description of the adjustments to convert Northstar's financial statements from
Canadian GAAP to U.S. GAAP. In addition, certain reclassifications have been
made to Northstar's historical consolidated financial statements to conform to
Devon's financial statement presentation.
In March, 1997, Northstar acquired all the outstanding common shares of
Morrison by issuing approximately 46.1 million Northstar Common Shares. The
Northstar Common Shares received by the Morrison shareholders represented
approximately 53% of the combined company's outstanding shares. Therefore, under
U.S. GAAP, this transaction would be accounted for as a reverse acquisition of
Northstar by Morrison. Accordingly, the results presented for periods through
March, 1997 for Northstar using U.S. GAAP represent the historical results of
Morrison, the "accounting acquirer." Because Northstar was the "legal acquirer,"
the financial results and other information for periods through March, 1997, are
referred to as "Northstar's" results and information, even though they represent
the historical results of Morrison. For periods subsequent to March, 1997, the
results presented for Northstar using U.S. GAAP represent the historical results
of Morrison, combined with the results of Northstar after valuing Northstar's
March, 1997, assets and liabilities at fair value, rather than historical book
value.
50
<PAGE> 57
DEVON-NORTHSTAR
NOTES TO UNAUDITED PRO FORMA COMBINED
FINANCIAL STATEMENTS -- (CONTINUED)
JUNE 30, 1998 AND 1997, AND DECEMBER 31, 1997, 1996 AND 1995
Under Canadian GAAP, the Morrison transaction was accounted for under the
pooling-of-interests method of accounting. Accordingly, for Northstar's results
presented using Canadian GAAP, the historical results of Northstar and Morrison
have been combined for all periods presented.
2. PRO FORMA ADJUSTMENTS
The accompanying unaudited pro forma combined balance sheet includes the
following adjustments:
(a) To record payment of estimated business combination costs of $13
million, representing primarily professional and advisory fees directly
related to the Combination. These one-time business combination costs are
not reflected in the pro forma statements of operations since they are
non-recurring in nature. These costs will be expensed by Devon in the
quarter in which the Combination is consummated.
(b) To reclassify deferred tax assets against deferred tax
liabilities.
(c) To record the issuance of 15,501,226 shares, par value $0.10, of
Devon Common Stock in exchange for all 68,287,338 shares of Northstar
Common Shares outstanding on June 30, 1998, based upon an Exchange Ratio
which is indirectly equivalent to 0.227 shares of Devon Common Stock for
each Northstar Common Share and assuming all Exchangeable Shares are
exchanged for Devon Common Stock on such basis.
The unaudited pro forma combined statements of operations reflect no
adjustments to the historical statements of Devon or the U.S. GAAP statements of
Northstar. Northstar's historical statements are adjusted for differences
between Canadian GAAP and U.S. GAAP, and for differences between Northstar's and
Devon's presentation, in the "Unaudited U.S. GAAP Financial
Information -- Northstar" immediately following these notes.
3. COMMON SHARES OUTSTANDING
Net earnings per average common share outstanding have been calculated
based upon the pro forma weighted average number of shares outstanding for each
period presented. For computing pro forma basic net earnings per share, Devon's
historical weighted average number of shares outstanding was increased in each
period by the weighted average number of Northstar common shares outstanding,
multiplied by the Exchange Ratio of 0.227. For computing pro forma diluted
earnings per share, Devon's historical weighted average number of diluted shares
was further increased by the dilutive effect of Northstar's stock options that
Devon will assume under the Combination. For the six month periods ended June
30, 1998 and 1997 and the years ended December 31, 1997, 1996 and 1995, the
additional number of diluted shares added for the effect of Northstar options to
be assumed were 27,000, 163,000, 199,000, 106,000, and 98,000 shares,
respectively.
51
<PAGE> 58
DEVON-NORTHSTAR
NOTES TO UNAUDITED PRO FORMA COMBINED
FINANCIAL STATEMENTS -- (CONTINUED)
JUNE 30, 1998 AND 1997, AND DECEMBER 31, 1997, 1996 AND 1995
4. OTHER REVENUE
Devon-Northstar pro forma combined other revenues consists of the following
items:
<TABLE>
<CAPTION>
SIX MONTHS
ENDED JUNE 30, YEAR ENDED DECEMBER 31,
----------------- ---------------------------
1998 1997 1997 1996 1995
------- ------- ------- ------- -------
(THOUSANDS)
<S> <C> <C> <C> <C> <C>
Third party gas processing income............ $ 3,400 $ 5,176 $ 7,318 $ 6,313 $ 1,465
Gain from termination of gas contract........ 5,047 -- -- -- --
Management contract termination fee.......... 2,765 -- -- -- --
Gain (loss) on sale of assets................ (57) 29,381 29,573 10,598 (273)
Management and administration fees........... 1,031 2,919 4,963 6,209 4,579
Alberta royalty tax credits.................. 966 1,034 2,137 1,191 1,076
Marketing revenues........................... (3) 203 165 688 1,273
Pipeline revenues............................ -- -- -- 3,455 3,179
Earnings (loss) from investments in
unconsolidated subsidiaries................ (902) (1,959) 382 3,559 684
Interest and other........................... 1,150 593 3,017 2,557 2,269
------- ------- ------- ------- -------
Total.............................. $13,397 $37,347 $47,555 $34,570 $14,252
======= ======= ======= ======= =======
</TABLE>
In the six month period ended June 30, 1998, Northstar U.S. GAAP other
revenues included $1.0 million of management and administration fees. However,
the arrangements under which such fees were generated were terminated during the
second quarter of 1998. Northstar received $2.8 million in June 1998 related to
the termination of such management arrangements. Also in June 1998, Northstar
received a one-time payment of $5.0 million from a gas purchaser for the
termination of a gas contract.
5. DEPRECIATION, DEPLETION AND AMORTIZATION RATE
Following is a comparison of Devon's combined depreciation, depletion and
amortization rate per Boe for its U.S. and Canadian full cost pools on an
historical basis before the Combination and on a pro forma basis after the
Combination.
<TABLE>
<CAPTION>
SIX MONTHS
ENDED JUNE 30, YEAR ENDED DECEMBER 31,
-------------- -----------------------
1998 1997 1997 1996 1995
----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C>
Historical rate prior to the Combination........... $4.23 $3.87 $4.08 $3.88 $3.65
Pro forma rate after the Combination............... $3.24 $4.44 $4.86 $3.69 $4.04
</TABLE>
The pro forma rates after the Combination for the years 1997 and 1995 do
not include the effects of Northstar's reduction of the carrying value of oil
and gas properties under ceiling limitations of its full cost pool in accordance
with SEC rules and regulations. The reductions totaled $625.5 million in 1997
and $97.1 million in 1995. The amounts of these reductions per Boe were $45.36
per Boe in 1997 and $12.74 per Boe in 1995.
6. SUPPLEMENTAL PRO FORMA INFORMATION ON OIL AND GAS OPERATIONS
The following pro forma supplemental information regarding oil and gas
operations is presented pursuant to the disclosure requirements promulgated by
the SEC and Statement of Financial Accounting Standards No. 69, "Disclosures
About Oil and Gas Producing Activities."
52
<PAGE> 59
DEVON-NORTHSTAR
NOTES TO UNAUDITED PRO FORMA COMBINED
FINANCIAL STATEMENTS -- (CONTINUED)
JUNE 30, 1998 AND 1997, AND DECEMBER 31, 1997, 1996 AND 1995
Pro Forma Capitalized Costs
The following table sets forth the aggregate amount of pro forma
capitalized costs relating to oil and gas producing activities and the aggregate
amount of related accumulated depreciation, depletion and amortization assuming
the Combination was consummated as of December 31, 1997.
<TABLE>
<S> <C>
Oil and gas properties:
Subject to amortization................................... $ 2,304,808,000
Not subject to amortization............................... 130,747,000
---------------
2,435,555,000
Accumulated depreciation, depletion and amortization...... (1,466,336,000)
---------------
Net capitalized costs..................................... $ 969,219,000
===============
Share of equity method investee's net capitalized costs..... $ 48,131,000
===============
</TABLE>
Pro Forma Results of Operations for Oil and Gas Producing Activities
The following tables include pro forma revenues and expenses associated
directly with oil and gas producing activities for the years ended December 31,
1997, 1996 and 1995, assuming the Combination was consummated at the beginning
of 1995. The following information does not include any allocation of pro forma
interest costs or general corporate overhead and, therefore, is not necessarily
indicative of the contribution to net earnings of oil and gas operations. Income
tax expense has been calculated by applying statutory income tax rates to oil
and gas sales after deducting costs, including depreciation, depletion and
amortization and reductions of carrying value of oil and gas properties, and
after giving effect to permanent differences and tax credits.
<TABLE>
<CAPTION>
TOTAL
-------------------------------------------
YEAR ENDED DECEMBER 31,
-------------------------------------------
1997 1996 1995
------------- ------------ ------------
<S> <C> <C> <C>
Oil, gas and NGLs sales........................... $ 452,104,000 $256,765,000 $195,890,000
Production and operating expenses................. (120,124,000) (69,614,000) (58,776,000)
Depreciation, depletion and amortization.......... (164,977,000) (67,832,000) (71,376,000)
Reduction of carrying value of oil and gas
properties...................................... (625,514,000) -- (97,061,000)
Income tax (expense) benefit...................... 159,511,000 (45,870,000) 17,016,000
------------- ------------ ------------
Results of operations for oil and gas producing
activities...................................... $(299,000,000) $ 73,449,000 $(14,307,000)
============= ============ ============
Share of equity method investee's results of
operations for oil and gas producing
activities...................................... $ (1,981,000) $ 620,000 $ --
============= ============ ============
</TABLE>
<TABLE>
<CAPTION>
DOMESTIC
------------------------------------------
YEAR ENDED DECEMBER 31,
------------------------------------------
1997 1996 1995
------------ ------------ ------------
<S> <C> <C> <C>
Oil, gas and NGLs sales............................ $273,860,000 $162,558,000 $112,425,000
Production and operating expenses.................. (75,758,000) (42,226,000) (34,121,000)
Depreciation, depletion and amortization........... (73,091,000) (41,538,000) (36,640,000)
Income tax expense................................. (44,648,000) (27,796,000) (15,536,000)
------------ ------------ ------------
Results of operations for oil and gas producing
activities....................................... $ 80,363,000 $ 50,998,000 $ 26,128,000
============ ============ ============
</TABLE>
53
<PAGE> 60
DEVON-NORTHSTAR
NOTES TO UNAUDITED PRO FORMA COMBINED
FINANCIAL STATEMENTS -- (CONTINUED)
JUNE 30, 1998 AND 1997, AND DECEMBER 31, 1997, 1996 AND 1995
<TABLE>
<CAPTION>
CANADA
-------------------------------------------
YEAR ENDED DECEMBER 31,
-------------------------------------------
1997 1996 1995
------------- ------------ ------------
<S> <C> <C> <C>
Oil, gas and NGLs sales........................... $ 178,244,000 $ 94,207,000 $ 83,465,000
Production and operating expenses................. (44,366,000) (27,388,000) (24,655,000)
Depreciation, depletion and amortization.......... (91,886,000) (26,294,000) (34,736,000)
Reduction of carrying value of oil and gas
properties...................................... (625,514,000) -- (97,061,000)
Income tax (expense) benefit...................... 204,159,000 (18,074,000) 32,552,000
------------- ------------ ------------
Results of operations for oil and gas producing
activities...................................... $(379,363,000) $ 22,451,000 $(40,435,000)
============= ============ ============
Share of equity method investee's results of
operations for oil and gas producing
activities...................................... $ (1,981,000) $ 620,000 $ --
============= ============ ============
</TABLE>
54
<PAGE> 61
DEVON-NORTHSTAR
NOTES TO UNAUDITED PRO FORMA COMBINED
FINANCIAL STATEMENTS -- (CONTINUED)
JUNE 30, 1998 AND 1997, AND DECEMBER 31, 1997, 1996 AND 1995
Pro Forma Quantities of Oil and Gas Reserves
Set forth below is a pro forma summary of the changes in the net quantities
of crude oil, natural gas and NGLs reserves for the three year period ended
December 31, 1997. The following information assumes the Combination was
effective as of the end of 1994.
<TABLE>
<CAPTION>
TOTAL
----------------------------------------
OIL (BBLS) GAS (MCF) NGLs (BBLS)
----------- ------------ -----------
<S> <C> <C> <C>
Actual Devon proved reserves as of December 31,
1994............................................... 42,165,000 347,560,000 5,442,000
Actual Northstar proved reserves as of December 31,
1994............................................ 15,779,000 191,600,000 2,223,000
----------- ------------ ----------
Pro forma Devon proved reserves as of December 31,
1994............................................... 57,944,000 539,160,000 7,665,000
Revisions of previous estimates.................... 2,250,000 (2,731,000) 532,000
Extensions and discoveries......................... 4,661,000 82,445,000 773,000
Purchase of reserves............................... 1,879,000 109,085,000 3,680,000
Production......................................... (7,130,000) (58,186,000) (831,000)
Sale of reserves................................... (605,000) (20,027,000) (269,000)
----------- ------------ ----------
Pro forma proved reserves as of December 31, 1995.... 58,999,000 649,746,000 11,550,000
Revisions of previous estimates.................... 4,982,000 (31,541,000) 1,022,000
Extensions and discoveries......................... 4,433,000 149,049,000 1,154,000
Purchase of reserves............................... 21,189,000 252,122,000 2,130,000
Production......................................... (6,780,000) (62,214,000) (1,255,000)
Sale of reserves................................... (2,668,000) (58,843,000) (411,000)
----------- ------------ ----------
Pro forma proved reserves as of December 31, 1996.... 80,155,000 898,319,000 14,190,000
Revisions of previous estimates.................... 42,000 (46,373,000) 1,544,000
Extensions and discoveries......................... 9,387,000 145,508,000 424,000
Purchase of reserves............................... 19,396,000 275,592,000 2,914,000
Production......................................... (11,783,000) (121,827,000) (1,891,000)
Sale of reserves................................... (156,000) (615,000) (3,000)
----------- ------------ ----------
Pro forma proved reserves as of December 31, 1997.... 97,041,000 1,150,604,000 17,178,000
=========== ============ ==========
Pro forma proved developed reserves as of:
December 31, 1994.................................. 34,497,000 515,902,000 5,346,000
December 31, 1995.................................. 43,236,000 597,564,000 8,230,000
December 31, 1996.................................. 72,330,000 810,465,000 12,563,000
December 31, 1997.................................. 88,258,000 984,374,000 16,332,000
Share of equity method investee's proved reserves as
of:
December 31, 1996.................................. 3,435,000 12,730,000 360,000
December 31, 1997.................................. 3,064,000 15,560,000 261,000
Share of equity method investee's proved developed
reserves as of:
December 31, 1996.................................. 2,665,000 12,433,000 347,000
December 31, 1997.................................. 2,543,000 15,356,000 254,000
</TABLE>
55
<PAGE> 62
DEVON-NORTHSTAR
NOTES TO UNAUDITED PRO FORMA COMBINED
FINANCIAL STATEMENTS -- (CONTINUED)
JUNE 30, 1998 AND 1997, AND DECEMBER 31, 1997, 1996 AND 1995
<TABLE>
<CAPTION>
DOMESTIC
--------------------------------------
OIL (BBLS) GAS (MCF) NGLS (BBLS)
---------- ----------- -----------
<S> <C> <C> <C>
Actual Devon proved reserves as of December 31, 1994... 42,165,000 347,560,000 5,442,000
Actual Northstar proved reserves as of December 31,
1994.............................................. -- -- --
---------- ----------- ----------
Pro forma Devon proved reserves as of December 31,
1994................................................. 42,165,000 347,560,000 5,442,000
Revisions of previous estimates...................... 1,127,000 (7,431,000) 535,000
Extensions and discoveries........................... 2,959,000 9,645,000 472,000
Purchase of reserves................................. 1,852,000 59,585,000 3,665,000
Production........................................... (3,300,000) (36,886,000) (600,000)
Sale of reserves..................................... (337,000) (8,627,000) (45,000)
---------- ----------- ----------
Pro forma proved reserves as of December 31, 1995...... 44,466,000 363,846,000 9,469,000
Revisions of previous estimates...................... 2,365,000 4,359,000 1,096,000
Extensions and discoveries........................... 3,680,000 14,849,000 852,000
Purchase of reserves................................. 13,659,000 209,064,000 1,246,000
Production........................................... (3,816,000) (35,714,000) (952,000)
Sale of reserves..................................... (403,000) (1,743,000) (16,000)
---------- ----------- ----------
Pro forma proved reserves as of December 31, 1996...... 59,951,000 554,661,000 11,695,000
Revisions of previous estimates...................... (1,358,000) (21,124,000) 1,531,000
Extensions and discoveries........................... 7,394,000 94,925,000 301,000
Purchase of reserves................................. 1,126,000 992,000 16,000
Production........................................... (6,055,000) (61,015,000) (1,468,000)
Sale of reserves..................................... (156,000) (615,000) (3,000)
---------- ----------- ----------
Pro forma proved reserves as of December 31, 1997...... 60,902,000 567,824,000 12,072,000
========== =========== ==========
Pro forma proved developed reserves as of:
December 31, 1994.................................... 18,718,000 324,302,000 3,123,000
December 31, 1995.................................... 28,703,000 311,664,000 6,149,000
December 31, 1996.................................... 52,672,000 529,407,000 10,328,000
December 31, 1997.................................... 53,059,000 462,082,000 11,289,000
</TABLE>
56
<PAGE> 63
DEVON-NORTHSTAR
NOTES TO UNAUDITED PRO FORMA COMBINED
FINANCIAL STATEMENTS -- (CONTINUED)
JUNE 30, 1998 AND 1997, AND DECEMBER 31, 1997, 1996 AND 1995
<TABLE>
<CAPTION>
CANADA
--------------------------------------
OIL (BBLS) GAS (MCF) NGLS (BBLS)
---------- ----------- -----------
<S> <C> <C> <C>
Actual Devon proved reserves as of December 31, 1994... -- -- --
Actual Northstar proved reserves as of December 31,
1994.............................................. 15,779,000 191,600,000 2,223,000
---------- ----------- ---------
Pro forma Devon proved reserves as of December 31,
1994................................................. 15,779,000 191,600,000 2,223,000
Revisions of previous estimates...................... 1,123,000 4,700,000 (3,000)
Extensions and discoveries........................... 1,702,000 72,800,000 301,000
Purchase of reserves................................. 27,000 49,500,000 15,000
Production........................................... (3,830,000) (21,300,000) (231,000)
Sale of reserves..................................... (268,000) (11,400,000) (224,000)
---------- ----------- ---------
Pro forma proved reserves as of December 31, 1995...... 14,533,000 285,900,000 2,081,000
Revisions of previous estimates...................... 2,617,000 (35,900,000) (74,000)
Extensions and discoveries........................... 753,000 134,200,000 302,000
Purchase of reserves................................. 7,530,000 43,058,000 884,000
Production........................................... (2,964,000) (26,500,000) (303,000)
Sale of reserves..................................... (2,265,000) (57,100,000) (395,000)
---------- ----------- ---------
Pro forma proved reserves as of December 31, 1996...... 20,204,000 343,658,000 2,495,000
Revisions of previous estimates...................... 1,400,000 (25,249,000) 13,000
Extensions and discoveries........................... 1,993,000 50,583,000 123,000
Purchase of reserves................................. 18,270,000 274,600,000 2,898,000
Production........................................... (5,728,000) (60,812,000) (423,000)
Sale of reserves..................................... -- -- --
---------- ----------- ---------
Pro forma proved reserves as of December 31, 1997...... 36,139,000 582,780,000 5,106,000
========== =========== =========
Pro forma proved developed reserves as of:
December 31, 1994.................................... 15,779,000 191,600,000 2,223,000
December 31, 1995.................................... 14,533,000 285,900,000 2,081,000
December 31, 1996.................................... 19,658,000 281,058,000 2,235,000
December 31, 1997.................................... 35,199,000 522,292,000 5,043,000
Share of equity method investee's proved reserves as
of:
December 31, 1996.................................... 3,435,000 12,730,000 360,000
December 31, 1997.................................... 3,064,000 15,560,000 261,000
Share of equity method investee's proved developed
reserves as of:
December 31, 1996.................................... 2,665,000 12,433,000 347,000
December 31, 1997.................................... 2,543,000 15,356,000 254,000
</TABLE>
57
<PAGE> 64
DEVON-NORTHSTAR
NOTES TO UNAUDITED PRO FORMA COMBINED
FINANCIAL STATEMENTS -- (CONTINUED)
JUNE 30, 1998 AND 1997, AND DECEMBER 31, 1997, 1996 AND 1995
Pro Forma Standardized Measure of Discounted Future Net Cash Flows
The accompanying tables reflect the pro forma standardized measure of
discounted future net cash flows relating to Devon's interest in proved oil, gas
and NGLs reserves as of December 31, 1997, 1996 and 1995, assuming the
Combination was effective as of the beginning of 1995.
<TABLE>
<CAPTION>
TOTAL
--------------------------------------------------
YEAR ENDED DECEMBER 31,
--------------------------------------------------
1997 1996 1995
--------------- --------------- --------------
<S> <C> <C> <C>
Future cash inflows......................... $ 3,728,815,000 $ 4,972,804,000 $2,050,722,000
Future costs:
Development............................... (120,277,000) (90,638,000) (71,190,000)
Production................................ (1,386,943,000) (1,377,410,000) (762,839,000)
Future income tax expense................... (399,972,000) (953,748,000) (153,431,000)
--------------- --------------- --------------
Future net cash flows....................... 1,821,623,000 2,551,008,000 1,063,262,000
10% discount to reflect timing of cash
flows..................................... (720,947,000) (1,096,034,000) (420,857,000)
--------------- --------------- --------------
Standardized measure of discounted future
net cash flows............................ $ 1,100,676,000 $ 1,454,974,000 $ 642,405,000
=============== =============== ==============
Discounted future net cash flows before
income taxes.............................. $ 1,340,644,000 $ 1,999,748,000 $ 730,753,000
=============== =============== ==============
Share of equity method investee's
standardized measure of discounted future
net cash flows............................ $ 34,172,000 $ 41,634,000 $ --
=============== =============== ==============
Share of equity method investee's discounted
future net cash flows before income
taxes..................................... $ 45,777,000 $ 64,619,000 $ --
=============== =============== ==============
</TABLE>
<TABLE>
<CAPTION>
DOMESTIC
-------------------------------------------------
YEAR ENDED DECEMBER 31,
-------------------------------------------------
1997 1996 1995
-------------- --------------- --------------
<S> <C> <C> <C>
Future cash inflows.......................... $2,304,602,000 $ 3,712,956,000 $1,476,418,000
Future costs:
Development................................ (83,350,000) (54,064,000) (52,327,000)
Production................................. (806,130,000) (1,013,750,000) (496,279,000)
Future income tax expense.................... (269,880,000) (713,182,000) (153,431,000)
-------------- --------------- --------------
Future net cash flows........................ 1,145,242,000 1,931,960,000 774,381,000
10% discount to reflect timing of cash
flows...................................... (481,263,000) (846,174,000) (328,481,000)
-------------- --------------- --------------
Standardized measure of discounted future net
cash flows................................. $ 663,979,000 $ 1,085,786,000 $ 445,900,000
============== =============== ==============
Discounted future net cash flows before
income taxes............................... $ 820,448,000 $ 1,486,603,000 $ 534,248,000
============== =============== ==============
</TABLE>
58
<PAGE> 65
DEVON-NORTHSTAR
NOTES TO UNAUDITED PRO FORMA COMBINED
FINANCIAL STATEMENTS -- (CONTINUED)
JUNE 30, 1998 AND 1997, AND DECEMBER 31, 1997, 1996 AND 1995
<TABLE>
<CAPTION>
CANADA
-----------------------------------------------
YEAR ENDED DECEMBER 31,
-----------------------------------------------
1997 1996 1995
-------------- -------------- -------------
<S> <C> <C> <C>
Future cash inflows............................ $1,424,213,000 $1,259,848,000 $ 574,304,000
Future costs:
Development.................................. (36,927,000) (36,574,000) (18,863,000)
Production................................... (580,813,000) (363,660,000) (266,560,000)
Future income tax expense...................... (130,092,000) (240,566,000) --
-------------- -------------- -------------
Future net cash flows.......................... 676,381,000 619,048,000 288,881,000
10% discount to reflect timing of cash flows... (239,684,000) (249,860,000) (92,376,000)
-------------- -------------- -------------
Standardized measure of discounted future net
cash flows................................... $ 436,697,000 $ 369,188,000 $ 196,505,000
============== ============== =============
Discounted future net cash flows before income
taxes........................................ $ 520,196,000 $ 513,145,000 $ 196,505,000
============== ============== =============
Share of equity method investee's standardized
measure of discounted future net cash
flows........................................ $ 34,172,000 41,634,000 --
============== ============== =============
Share of equity method investee's discounted
future net cash flows before income taxes.... $ 45,777,000 $ 64,619,000 $ --
============== ============== =============
</TABLE>
Future cash inflows are computed by applying year-end prices (averaging
$16.22 per barrel of oil, adjusted for transportation and other charges, $1.64
per Mcf of gas and $13.32 per barrel of NGLs at December 31, 1997) to the
year-end quantities of proved reserves, except in those instances where fixed
and determinable price changes are provided by contractual arrangements in
existence at year-end. In addition to the future gas revenues calculated at
$1.64 per Mcf, Devon's total future gas revenues also include the future tax
credit payments to be received and recorded as gas revenues pursuant to the San
Juan Basin Transaction described in Note 3 to Devon's consolidated financial
statements which are included elsewhere herein. Devon's future total and
domestic cash inflows as of December 31, 1997, shown in the tables above include
$35.2 million related to these tax credit payments from 1998 through 2002. This
amount has been calculated using the assumption that the year-end 1997 tax
credit rate of $1.05 per MMBtu remains constant.
Future development and production costs are computed by estimating the
expenditures to be incurred in developing and producing proved oil and gas
reserves at the end of the year, based on year-end costs and assuming
continuation of existing economic conditions.
Future income tax expenses are computed by applying the appropriate
statutory tax rates to the future pretax net cash flows relating to proved
reserves, net of the tax basis of the properties involved. The future income tax
expenses give effect to permanent differences and tax credits, but do not
reflect the impact of future operations.
59
<PAGE> 66
DEVON-NORTHSTAR
NOTES TO UNAUDITED PRO FORMA COMBINED
FINANCIAL STATEMENTS -- (CONTINUED)
JUNE 30, 1998 AND 1997, AND DECEMBER 31, 1997, 1996 AND 1995
Pro Forma Changes Relating to the Standardized Measure of Discounted Future
Net Cash Flows
Principal changes in the total U.S. and Canadian combined standardized
measure of discounted future net cash flows attributable to Devon's proved
reserves are shown in the following table. The following reconciliation assumes
that the Combination was effective as of the end of 1994.
<TABLE>
<CAPTION>
TOTAL
-----------------------------------------------
YEAR ENDED DECEMBER 31,
-----------------------------------------------
1997 1996 1995
-------------- -------------- -------------
<S> <C> <C> <C>
Devon's actual beginning balance as of December
31, 1994....................................... $ 358,206,000
Northstar's actual beginning balance as of
December 31, 1994........................... 168,459,000
-------------
Pro forma beginning balance...................... $1,454,974,000 $ 642,405,000 526,665,000
Sales of oil, gas and NGLs, net of production
costs.......................................... (331,980,000) (187,151,000) (137,114,000)
Net changes in prices and production costs....... (890,534,000) 763,909,000 55,163,000
Extensions, discoveries, and improved recovery,
net of future development costs................ 75,698,000 145,310,000 45,256,000
Purchase of reserves, net of future development
costs.......................................... 246,173,000 578,099,000 63,943,000
Development costs incurred during the period
which reduced future development costs......... 62,868,000 63,123,000 56,287,000
Revisions of quantity estimates.................. (12,251,000) 35,852,000 17,501,000
Sales of reserves in place....................... (1,395,000) (81,452,000) (14,939,000)
Accretion of discount............................ 198,401,000 73,000,000 59,584,000
Net change in income taxes....................... 300,684,000 (456,426,000) (23,906,000)
Other, primarily changes in timing............... (1,962,000) (121,695,000) (6,035,000)
-------------- -------------- -------------
Pro forma ending balance......................... $1,100,676,000 $1,454,974,000 $ 642,405,000
============== ============== =============
</TABLE>
60
<PAGE> 67
UNAUDITED U.S. GAAP FINANCIAL INFORMATION -- NORTHSTAR
Set forth below is certain unaudited U.S. GAAP financial information with
respect to Northstar prior to the Combination. Such unaudited U.S. GAAP
financial information converts Northstar's historical information, which is
presented under Canadian GAAP and Canadian dollars, to U.S. GAAP and U.S.
dollars, and conforms to Devon presentation.
The following unaudited U.S. GAAP financial statements should be read in
conjunction with the notes thereto immediately following such unaudited U.S.
GAAP financial statements, and the consolidated financial statements and related
notes of Northstar which are included elsewhere herein.
In March, 1997, Northstar acquired all the outstanding common shares of
Morrison by issuing approximately 46.1 million Northstar Common Shares. Under
Canadian GAAP, the Morrison transaction was accounted for under the
pooling-of-interests method of accounting. Accordingly, the information
presented in the following unaudited U.S. GAAP financial statements as
"Northstar Historical" represents Northstar's historical results presented using
Canadian GAAP, whereby the historical results of Northstar and Morrison have
been combined for all periods presented.
The Northstar Common Shares received by the Morrison shareholders
represented approximately 53% of the combined company's outstanding shares.
Therefore, under U.S. GAAP, the Morrison transaction would be accounted for as a
reverse acquisition of Northstar by Morrison. Accordingly, for the following
unaudited U.S. GAAP financial statements, the results presented for periods
through March, 1997 as "Northstar Using U.S. GAAP," represent the historical
results of Morrison, the "accounting acquirer." Because Northstar was the "legal
acquirer," the financial results for periods through March, 1997, are referred
to as "Northstar's" results, even though they represent the historical results
of Morrison. For periods subsequent to March, 1997, the results presented as
"Northstar Using U.S. GAAP" represent the historical results of Morrison,
combined with the results of Northstar after valuing Northstar's March, 1997,
assets and liabilities at fair value, rather than historical book value.
UNAUDITED U.S. GAAP BALANCE SHEET -- NORTHSTAR
JUNE 30, 1998
(IN THOUSANDS)
<TABLE>
<CAPTION>
U.S. GAAP NORTHSTAR CONVERTED
NORTHSTAR AND OTHER USING TO
HISTORICAL ADJUSTMENTS(3) U.S. GAAP U.S.$(4)
----------- -------------- ---------- ---------
<S> <C> <C> <C> <C>
Assets:
Current assets......................................... C$ 99,203 C$ (2,948)(b) C$ 96,255 $ 65,579
Property and equipment, net............................ 1,024,171 423,408(a) 390,084 265,764
(47,319)(b)
(998,412)(c)
(11,764)(e)
Deferred income taxes.................................. -- 81,932(d) 81,932 55,820
Other assets, net...................................... 45,828 (533)(a) 66,357 45,209
35,875(b)
(14,813)(e)
----------- ---------- ---------- ---------
Total assets..................................... C$1,169,202 C$(534,574) C$634,628 $ 432,372
=========== ========== ========== =========
Liabilities:
Current liabilities.................................... C$ 92,019 C$ (2,841)(b) C$ 89,178 $ 60,757
Deferred revenue....................................... 12,097 -- 12,097 8,241
Other liabilities...................................... 18,875 (6,652)(a) -- --
(459)(b)
(11,764)(e)
Long-term debt......................................... 443,384 -- 443,384 302,078
Deferred income taxes.................................. 176,264 129,421(a) -- --
(305,685)(d)
Stockholders' equity:
Stockholders' equity -- Northstar...................... 316,135 219,723(a) -- --
(535,858)(e)
Additional paid-in capital............................. -- 535,858(e) 535,858 396,030
Retained earnings (deficit)............................ 110,428 80,383(a) (445,889) (316,649)
(11,092)(b)
(998,412)(c)
387,617(d)
(14,813)(e)
Accumulated other comprehensive earnings
(loss) -- foreign currency translation adjustments... -- -- -- (18,085)
----------- ---------- ---------- ---------
Total stockholders' equity....................... 426,563 (336,594) 89,969 61,296
----------- ---------- ---------- ---------
Total liabilities and stockholders' equity....... C$1,169,202 C$(534,574) C$634,628 $ 432,372
=========== ========== ========== =========
</TABLE>
See accompanying notes to unaudited U.S. GAAP financial statements.
61
<PAGE> 68
UNAUDITED U.S. GAAP STATEMENT OF OPERATIONS -- NORTHSTAR
FOR THE SIX MONTHS ENDED JUNE 30, 1998
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
U.S. GAAP NORTHSTAR CONVERTED
NORTHSTAR AND OTHER USING TO
HISTORICAL ADJUSTMENTS(3) U.S. GAAP U.S.$(4)
---------- -------------- --------- ---------
<S> <C> <C> <C> <C>
Revenues:
Oil sales................................ C $54,453 C $(7,611)(f) $C 43,410 $30,009
(3,432)(j)
Gas sales................................ 72,691 (18,829)(f) 52,475 36,276
(1,387)(j)
Natural gas liquids sales................ 2,300 267(f) 2,458 1,699
(109)(j)
Less royalties........................... (19,177) 19,177(f) -- --
Other.................................... 44,153 11,466(f) 14,168 9,794
(1,304)(j)
(40,147)(i)
--------- --------- --------- -------
Total revenues................... 154,420 (41,909) 112,511 77,778
--------- --------- --------- -------
Costs and expenses:
Lease operating expenses................. 29,110 2,577(f) 29,751 20,567
(1,936)(j)
Production taxes......................... -- 1,052(f) 1,052 727
Depreciation, depletion and
amortization.......................... 61,353 (2,990)(j) 23,338 16,134
(35,025)(k)
General and administrative expenses...... 6,876 841(f) 7,296 5,044
(421)(j)
Interest expense......................... 15,602 -- 15,602 10,786
Deferred effect of changes in foreign
currency exchange rate on long-term
debt.................................. -- 10,012(g) 10,012 6,921
--------- --------- --------- -------
Total costs and expenses......... 112,941 (25,890) 87,051 60,179
--------- --------- --------- -------
Earnings before income taxes............... 41,479 (16,019) 25,460 17,599
Income tax expense:
Current.................................. 1,271 (266)(j) 1,005 695
Deferred................................. 7,503 10,106(l) 11,952 8,262
(5,657)(i)
--------- --------- --------- -------
Total income tax expense......... 8,774 4,183 12,957 8,957
--------- --------- --------- -------
Net earnings............................... C $32,705 C $(20,202) $C 12,503 $ 8,642
========= ========= ========= =======
Net earnings per average common share
outstanding:
Basic.................................... C $ 0.48 $C 0.18 $ 0.13
Diluted.................................. C $ 0.46 $C 0.18 $ 0.13
Weighted average common shares
outstanding.............................. 68,167 68,167 68,167
</TABLE>
See accompanying notes to unaudited U.S. GAAP financial statements.
62
<PAGE> 69
UNAUDITED U.S. GAAP STATEMENT OF OPERATIONS -- NORTHSTAR
FOR THE SIX MONTHS ENDED JUNE 30, 1997
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
U.S. GAAP NORTHSTAR CONVERTED
NORTHSTAR AND OTHER USING TO
HISTORICAL ADJUSTMENTS(3) U.S. GAAP U.S.$(4)
---------- -------------- --------- ---------
<S> <C> <C> <C> <C>
Revenues:
Oil sales................................. C$ 81,921 C$(12,120)(f) C$39,221 $28,290
(25,517)(i)
(5,063)(j)
Gas sales................................. 67,782 (8,298)(f) 34,508 24,891
(23,295)(i)
(1,681)(j)
Natural gas liquids sales................. 7,541 (2,150)(f) 2,962 2,136
(2,005)(i)
(424)(j)
Less royalties............................ (34,381) 22,484(f) -- --
11,897(i)
Other..................................... 47,177 8,878(f) 47,314 34,128
(2,025)(i)
(6,716)(j)
--------- --------- -------- -------
Total revenues.................... 170,040 (46,035) 124,005 89,445
--------- --------- -------- -------
Costs and expenses:
Lease operating expenses.................. 24,585 4,976(f) 21,611 15,588
(6,316)(i)
(1,634)(j)
Production taxes.......................... -- 794(f) 794 573
Depreciation, depletion and
amortization........................... 56,391 (14,811)(i) 40,869 29,479
(2,997)(j)
2,286(k)
General and administrative expenses....... 7,222 3,024(f) 7,686 5,544
(1,720)(i)
(840)(j)
Interest expense.......................... 9,171 (1,564)(i) 7,607 5,488
Deferred effect of changes in foreign
currency exchange rate on long-term
debt................................... -- 369(g) 369 266
--------- --------- -------- -------
Total costs and expenses.......... 97,369 (18,433) 78,936 56,938
--------- --------- -------- -------
Earnings before income taxes................ 72,671 (27,602) 45,069 32,507
Income tax expense (benefit):
Current................................... 1,436 (308)(i) 1,083 781
(45)(j)
Deferred.................................. 30,253 (6,815)(i) 20,138 14,526
(3,300)(l)
--------- --------- -------- -------
Total income tax expense
(benefit)....................... 31,689 (10,468) 21,221 15,307
--------- --------- -------- -------
Net earnings................................ C$ 40,982 C$(17,134) C$23,848 $17,200
========= ========= ======== =======
Net earnings per average common share
outstanding:
Basic..................................... C$ 0.52 C$ 0.35 $ 0.25
Diluted................................... C$ 0.50 C$ 0.35 $ 0.25
Weighted average common shares
outstanding............................... 79,186 68,761 68,761
</TABLE>
See accompanying notes to unaudited U.S. GAAP financial statements.
63
<PAGE> 70
UNAUDITED U.S. GAAP STATEMENT OF OPERATIONS -- NORTHSTAR
FOR THE YEAR ENDED DECEMBER 31, 1997
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
U.S. GAAP NORTHSTAR CONVERTED
NORTHSTAR AND OTHER USING TO
HISTORICAL ADJUSTMENTS(3) U.S. GAAP U.S.$(4)
---------- -------------- ----------- ---------
<S> <C> <C> <C> <C>
Revenues:
Oil sales.............................. C$165,385 C$ (26,868)(f) C$ 102,824 $ 74,280
(25,517)(i)
(10,176)(j)
Gas sales.............................. 139,776 (17,549)(f) 95,391 68,910
(23,295)(i)
(3,541)(j)
Natural gas liquids sales.............. 8,114 (1,390)(f) 4,382 3,166
(2,005)(i)
(337)(j)
Less royalties......................... (57,776) 45,879(f) -- --
11,897(i)
Other.................................. 51,387 12,517(f) 55,596 40,163
(2,025)(i)
(6,283)(j)
--------- ---------- ----------- ---------
Total revenues................. 306,886 (48,693) 258,193 186,519
--------- ---------- ----------- ---------
Costs and expenses:
Lease operating expenses............... 53,274 5,602(f) 48,784 35,242
(6,316)(i)
(3,776)(j)
Production taxes....................... -- 1,804(f) 1,804 1,303
Depreciation, depletion and
amortization........................ 118,815 20,624(i) 116,003 83,801
(6,293)(j)
(17,143)(k)
General and administrative expenses.... 12,494 5,183(f) 15,863 11,459
(1,720)(i)
(94)(j)
Interest expense....................... 31,305 (1,564)(i) 25,629 18,514
(109)(j)
(4,003)(g)
Deferred effect of changes in foreign
currency exchange rate on long-term
debt................................ -- 8,111(g) 8,111 5,860
Reduction of carrying value of oil and
gas properties...................... -- 865,883(k) 865,883 625,514
--------- ---------- ----------- ---------
Total costs and expenses....... 215,888 866,189 1,082,077 781,693
--------- ---------- ----------- ---------
Earnings (loss) before income taxes...... 90,998 (914,882) (823,884) (595,174)
Income tax expense (benefit):
Current................................ 2,826 (308)(i) 2,291 1,655
(227)(j)
Deferred............................... 38,107 (6,815)(i) (306,680) (221,546)
(337,972)(l)
--------- ---------- ----------- ---------
Total income tax expense
(benefit).................... 40,933 (345,322) (304,389) (219,891)
--------- ---------- ----------- ---------
Net earnings (loss)...................... C$ 50,065 C$(569,560) C$ (519,495) $(375,283)
========= ========== =========== =========
Net earnings (loss) per average common
share outstanding:
Basic.................................. C$ 0.68 C$ (8.24) $ (5.95)
Diluted................................ C$ 0.66 C$ (8.24) $ (5.95)
Weighted average common shares
outstanding............................ 73,505 63,080 63,080
</TABLE>
See accompanying notes to unaudited U.S. GAAP financial statements.
64
<PAGE> 71
UNAUDITED U.S. GAAP STATEMENT OF OPERATIONS -- NORTHSTAR
FOR THE YEAR ENDED DECEMBER 31, 1996
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
U.S. GAAP NORTHSTAR CONVERTED
NORTHSTAR AND OTHER USING TO
HISTORICAL ADJUSTMENTS(3) U.S. GAAP U.S.$(4)
---------- -------------- --------- ---------
<S> <C> <C> <C> <C>
Revenues: (22,253)(f)
Oil sales............................. C$195,497 C$ (94,238)(h) C$ 76,236 $ 55,881
(2,770)(j)
Gas sales............................. 123,504 (8,995)(f) 45,559 33,394
(68,256)(h)
(694)(j)
Natural gas liquids sales............. 15,127 (1,612)(f) 6,728 4,932
(6,619)(h)
(168)(j)
Less royalties........................ (63,138) 31,538(f) -- --
31,600(h)
Other................................. 37,140 11,800(f) 45,172 33,111
(4,448)(h)
680(j)
--------- ---------- --------- --------
Total revenues................ 308,130 (134,435) 173,695 127,318
--------- ---------- --------- --------
Costs and expenses: 4,392(f)
Lease operating expenses.............. 56,940 (23,633)(h) 37,062 27,166
(637)(j)
Production taxes...................... -- 303(f) 303 222
Depreciation, depletion and
amortization....................... 119,828 (62,911)(h) 36,761 26,946
(1,468)(j)
(18,688)(k)
General and administrative expenses... 7,639 5,783(f) 8,199 6,010
(5,169)(h)
(54)(j)
Interest expense...................... 17,105 (6,891)(h) 10,075 7,385
(139)(j)
Deferred effect of changes in foreign
currency exchange rate on long-term
debt............................... -- 272(g) 272 199
--------- ---------- --------- --------
Total costs and expenses...... 201,512 (108,840) 92,672 67,928
--------- ---------- --------- --------
Earnings before income taxes............ 106,618 (25,595) 81,023 59,390
Income tax expense (benefit):
Current............................... 2,827 (1,273)(h) 1,535 1,125
(19)(j)
Deferred.............................. 41,729 (16,192)(h) 34,738 25,463
9,201(1)
--------- ---------- --------- --------
Total income tax expense
(benefit)................... 44,556 (8,283) 36,273 26,588
--------- ---------- --------- --------
Net earnings............................ C$ 62,062 C$ (17,312) C$ 44,750 $ 32,802
========= ========== ========= ========
Net earnings per average common share
outstanding:
Basic................................. C$ 0.72 C$ 0.99 $ 0.72
Diluted............................... C$ 0.70 C$ 0.99 $ 0.72
Weighted average common shares
outstanding........................... 85,832 45,326 45,326
</TABLE>
See accompanying notes to unaudited U.S. GAAP financial statements.
65
<PAGE> 72
UNAUDITED U.S. GAAP STATEMENT OF OPERATIONS -- NORTHSTAR
FOR THE YEAR ENDED DECEMBER 31, 1995
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
U.S. GAAP NORTHSTAR CONVERTED
NORTHSTAR AND OTHER USING TO
HISTORICAL ADJUSTMENTS(3) U.S. GAAP U.S.$(4)
---------- -------------- --------- ---------
<S> <C> <C> <C> <C>
Revenues:
Oil sales............................ C$156,755 C$ (21,530)(f) C$ 82,658 $ 60,316
(52,567)(h)
Gas sales............................ 93,221 (3,246)(f) 28,041 20,462
(61,934)(h)
Natural gas liquids sales............ 11,143 (1,590)(f) 3,682 2,687
(5,871)(h)
Less royalties....................... (43,372) 25,193(f) -- --
18,179(h)
Other................................ 12,163 7,251(f) 18,330 13,375
(1,084)(h)
--------- ---------- --------- --------
Total revenues............... 229,910 (97,199) 132,711 96,840
--------- ---------- --------- --------
Costs and expenses:
Lease operating expenses............. 47,852 2,008(f) 33,486 24,435
(16,374)(h)
Production taxes..................... -- 301(f) 301 220
Depreciation, depletion and
amortization...................... 101,353 (48,806)(h) 48,445 35,350
(4,102)(k)
General and administrative
expenses.......................... 8,969 3,769(f) 8,890 6,487
(3,848)(h)
Interest expense..................... 12,392 (7,138)(h) 5,254 3,834
Deferred effect of changes in foreign
currency exchange rate on
long-term debt.................... -- 421(g) 421 307
Reduction of carrying value of oil
and gas properties................ -- 133,015(k) 133,015 97,061
--------- ---------- --------- --------
Total costs and expenses..... 170,566 59,246 229,812 167,694
--------- ---------- --------- --------
Earnings before income taxes........... 59,344 (156,445) (97,101) (70,854)
Income tax expense (benefit):
Current.............................. 1,696 (604)(h) 1,092 797
Deferred............................. 21,070 (7,100)(h) (42,834) (31,256)
(56,804)(l)
--------- ---------- --------- --------
Total income tax expense
(benefit).................. 22,766 (64,508) (41,742) (30,459)
--------- ---------- --------- --------
Net earnings........................... C$ 36,578 C$ (91,937) C$(55,359) $(40,395)
========= ========== ========= ========
Net earnings per average common share
outstanding:
Basic................................ C$ 0.45 C$ (1.25) $ (0.91)
Diluted.............................. C$ 0.44 C$ (1.25) $ (0.91)
Weighted average common shares
outstanding.......................... 81,270 44,250 44,250
</TABLE>
See accompanying notes to unaudited U.S. GAAP financial statements.
66
<PAGE> 73
NOTES TO UNAUDITED U.S. GAAP
FINANCIAL STATEMENTS -- NORTHSTAR
JUNE 30, 1998 AND 1997, AND DECEMBER 31, 1997, 1996 AND 1995
1. BASIS OF PRESENTATION
The accompanying unaudited U.S. GAAP financial information of Northstar is
presented to reflect Northstar's financial information under U.S. GAAP and U.S.
dollars and in conformity with Devon's financial statement presentation. The
unaudited U.S. GAAP financial information should be read in conjunction with the
historical consolidated financial statements and related notes thereto for
Northstar that are included elsewhere herein.
The historical consolidated financial statement information for Northstar
was prepared under Canadian GAAP and in Canadian dollars. For these unaudited
U.S. GAAP financial statements, the historical financial information of
Northstar have been converted to U.S. dollars using the June 30, 1998, exchange
rate for the balance sheet and the average exchange rates for the six month
periods ended June 30, 1998 and 1997 and the years 1997, 1996 and 1995, for the
statements of operations. These unaudited U.S. GAAP financial statements also
contain certain adjustments to conform the historical Northstar financial
statements to U.S. GAAP as described in the following notes. Also, see Note 13
to Northstar's historical consolidated financial statements included elsewhere
herein for a description of the adjustments to convert Northstar's financial
statements from Canadian GAAP to U.S. GAAP. In addition, certain
reclassifications have been made to Northstar's historical consolidated
financial statements to conform to Devon's financial statement presentation.
2. NORTHSTAR -- MORRISON BUSINESS COMBINATION
In March, 1997, Northstar acquired all the outstanding common shares of
Morrison by issuing approximately 46.1 million Northstar Common Shares. Under
Canadian GAAP, this acquisition was accounted for as a pooling-of-interests.
Accordingly, Northstar's historical financial position as of June 30, 1998, and
its historical financial results for the six month periods ended June 30, 1998
and 1997, and for the years ended December 31, 1997, 1996 and 1995, are
presented as if Northstar and Morrison had been combined for all periods
presented.
The Northstar Common Shares received by the Morrison shareholders
represented approximately 53% of the combined company's outstanding shares.
Therefore, under U.S. GAAP, the Morrison transaction would be accounted for as a
reverse acquisition of Northstar by Morrison. Accordingly, for the accompanying
unaudited U.S. GAAP financial statements, the results presented for periods
through March, 1997 as "Northstar Using U.S. GAAP," represent the historical
results of Morrison, the "accounting acquirer." Because Northstar was the "legal
acquirer," the financial results for periods through March, 1997, are referred
to as "Northstar's" results, even though they represent the historical results
of Morrison. For periods subsequent to March, 1997, the results presented as
"Northstar Using U.S. GAAP" represent the historical results of Morrison,
combined with the results of Northstar after valuing Northstar's March, 1997,
assets and liabilities at fair value, rather than historical book value.
Because of the significant difference in accounting for this acquisition
between Canadian GAAP and U.S. GAAP, the accompanying unaudited U.S. GAAP
financial statements of Northstar include a number of adjustments concerning the
Morrison acquisition. Those adjustments are described in detail in the following
Note 3.
3. U.S. GAAP ADJUSTMENTS
The accompanying U.S. GAAP balance sheet includes the following
adjustments:
(a) To adjust for the effect of accounting for the Morrison
transaction using the reverse acquisition purchase method of accounting
under U.S. GAAP as opposed to the pooling-of-interests method that was used
under Canadian GAAP.
67
<PAGE> 74
NOTES TO UNAUDITED U.S. GAAP
FINANCIAL STATEMENTS -- NORTHSTAR -- (CONTINUED)
(b) To adjust for the effect of accounting for Northstar's 50%
interest in a Canadian oil and gas corporation using the equity method
under U.S. GAAP. For Canadian GAAP, this interest is proportionately
consolidated.
(c) To adjust for the cumulative effect of reductions to the carrying
value of Northstar's oil and gas properties using the U.S. GAAP full cost
ceiling limitations set forth by the Securities and Exchange Commission
rules and regulations for the full cost method of accounting for oil and
gas operations.
(d) To adjust for the effect of deferred income tax accounting under
U.S. GAAP.
(e) To adjust for other miscellaneous differences between Canadian
GAAP and U.S. GAAP, including reclassifying accrued site restoration costs
from other liabilities to accumulated depreciation, depletion and
amortization to conform to Devon's presentation.
The accompanying U.S. GAAP statements of operations include the following
adjustments:
(f) To allocate oil, gas and NGLs royalty payments to oil, gas and
NGLs revenues in accordance with U.S. GAAP; to reclassify third party gas
processing revenues from lease operating expenses to other revenues to
conform to Devon's presentation; to reclassify gain from gas contract
terminations from gas sales to other revenues to conform to Devon's
presentation; and to reclassify management fees earned from general and
administrative expenses to other revenues to conform to Devon's
presentation
(g) To record foreign currency transaction gains and losses in
accordance with U.S. GAAP.
(h) To remove the 1996 and 1995 results of Northstar originally
recorded as a pooling-of-interests under Canadian GAAP.
(i) To remove the first quarter 1997 results of Northstar originally
recorded as a pooling-of-interests under Canadian GAAP, and adjust the last
nine months of 1997 and the first six months of 1998 for the effect of
recording the Morrison transaction using the reverse acquisition purchase
method of accounting under U.S. GAAP.
(j) To adjust for the effect of accounting for Northstar's 50%
interest in a Canadian oil and gas corporation using the equity method
under U.S. GAAP. For Canadian GAAP, this interest is proportionately
consolidated.
(k) To record a C$865.9 million (U.S.$625.5 million) and a C$133.0
million (U.S.$97.1 million) reduction of the carrying value of oil and gas
properties as of December 31, 1997 and 1995, respectively, in accordance
with the full cost ceiling limitation set forth by SEC rules and
regulations for the full cost method of accounting for oil and gas
operations. The deferred tax benefits of these reductions to oil and gas
properties were C$315.0 million (U.S.$227.6 million) in 1997 and C$59.3
million (U.S.$43.3 million) in 1995.
As a result of the reductions of the carrying values of oil and gas
properties in 1997 and 1995, as well as 1994 and 1991, reductions of
Northstar's historical depreciation, depletion and amortization expense are
reflected in periods subsequent to the reductions.
(l) To adjust the historical income tax expense for (1) the effects of
the U.S. GAAP adjustments described above, and (2) to convert to the income
tax accounting method as prescribed by U.S. GAAP.
68
<PAGE> 75
NOTES TO UNAUDITED U.S. GAAP
FINANCIAL STATEMENTS -- NORTHSTAR -- (CONTINUED)
4. CONVERSION TO U.S. DOLLARS
For the June 30, 1998, U.S. GAAP balance sheet, the stockholders' equity
balance was adjusted using historical exchange rates in effect at the time of
the various capital transactions. All other accounts were adjusted using the
June 30, 1998, exchange rate of C$1.00 to U.S.$0.68.
For the U.S. GAAP statements of operations for the six month periods ended
June 30, 1998 and 1997, and the years ended December 31, 1997, 1996 and 1995,
Canadian dollars were converted to U.S. dollars using the following exchange
rates: $0.69, $0.72, $0.72, $0.73 and $0.73, respectively, which are the average
of the month end exchange rates for such periods.
69
<PAGE> 76
THE MEETINGS
DEVON
Purpose of the Meeting. The purpose of the Devon Meeting is to consider and
act upon: (i) a proposal to approve the Combination Agreement and the
Combination; (ii) a proposal to approve and adopt the Certificate Amendment;
(iii) a proposal to approve and adopt the Option Plan Amendment; and (iv) such
other business as may be properly presented to the meeting.
Recommendation of the Board of Directors. THE DEVON BOARD BELIEVES THAT THE
COMBINATION IS IN THE BEST INTERESTS OF DEVON STOCKHOLDERS AND UNANIMOUSLY
RECOMMENDS THAT THE DEVON STOCKHOLDERS VOTE TO: (I) APPROVE THE COMBINATION
AGREEMENT AND THE COMBINATION; (II) APPROVE AND ADOPT THE CERTIFICATE AMENDMENT;
AND (III) APPROVE AND ADOPT THE OPTION PLAN AMENDMENT.
Solicitation and Voting of Proxies. The accompanying proxy is solicited on
behalf of the Devon Board for use at the Devon Meeting, to be held at 10:00 a.m.
(local time) on December 9, 1998. Only Devon Stockholders at the close of
business on October 27, 1998 will be entitled to vote at the Devon Meeting. At
the close of business on that date, there were 32,319,894 shares of Devon Common
Stock outstanding and entitled to vote. A majority of those shares, present in
person or by proxy, will constitute a quorum for the transaction of business.
Abstentions and broker non-votes will be considered to be represented for
purposes of a quorum. This Joint Proxy Statement and the accompanying form of
proxy were first mailed to Devon Stockholders on or about November 6, 1998.
Revocability of Proxy. A Devon Stockholder who has given a proxy may revoke
it at any time before it is exercised at the Devon Meeting, by: (i) delivering
to the corporate secretary of Devon (by any means, including facsimile) a
written notice stating that the proxy is revoked; (ii) signing and so delivering
a proxy bearing a later date; or (iii) attending the Devon Meeting and voting in
person (although attendance at the Devon Meeting will not, by itself, revoke a
proxy).
Expenses of Proxy Solicitation. The cost of soliciting proxies to be voted
at the Devon Meeting will be paid by Devon. Morrow & Co., Inc., New York, New
York, has been employed to solicit proxies by mail, telephone or personal
solicitation for a fee of approximately $6,500 plus expenses. Devon has also
arranged for reimbursement, at the rate suggested by the New York Stock
Exchange, to brokerage houses, nominees, custodians and fiduciaries for the
forwarding of proxy materials to the beneficial owners of shares of Devon Common
Stock held of record. Proxies may also be solicited by directors, officers, and
employees of Devon, but such persons will not be specially compensated for such
services.
Voting Rights. Devon Stockholders are entitled to one vote for each share
held as of the Devon Record Date. Approval by the Devon Stockholders of the
Combination Agreement and the Combination is required by the rules of the AMEX.
Such approval requires the affirmative vote of a majority of votes cast on the
proposal, either in person or by proxy, at the Devon Meeting. Approval and
adoption of the Certificate Amendment requires the affirmative vote of the
holders of a majority of the outstanding shares of Devon Common Stock. Approval
of the Option Plan Amendment requires the affirmative vote of a majority of
votes cast on the proposal, either in person or by proxy, at the Devon Meeting,
and entitled to vote on the proposal. Abstentions and broker non-votes (shares
which are present at the meeting and for which a broker or nominee has received
no instruction by the beneficial owner as to how such owner wishes the shares to
be voted) are counted for purposes of determining whether a quorum is present at
the meeting. Abstentions and broker non-votes will have the same effect as a
negative vote with regard to the proposal to approve the Certificate Amendment.
Abstentions and broker non-votes will not count as shares voting "for" or
"against" with respect to approval of the Combination Agreement and the
Combination or the Option Plan Amendment and will have no effect in determining
whether such proposals have been approved.
Auditors. KPMG Peat Marwick LLP, independent auditors, ("KPMG") have served
as the independent auditors of Devon since 1980. Representatives of KPMG plan to
attend the Devon Meeting and will be available to answer appropriate questions.
Its representatives will also have an opportunity to make a statement at the
meeting if they so desire, although it is not expected that any statement will
be made.
70
<PAGE> 77
Stockholder Proposals. Any Devon Stockholder who wishes to submit a
proposal for action to be included in the proxy statement and form of proxy
relating to Devon's 1999 annual meeting of stockholders is required to submit
such proposal to Devon on or before December 1, 1998.
NORTHSTAR
Purpose of the Meeting. The purpose of the Northstar Meeting is to consider
and act upon the Arrangement Resolution and such other business as may be
properly presented to the meeting.
Recommendation of the Board of Directors. THE NORTHSTAR BOARD BELIEVES THAT
THE COMBINATION IS IN THE BEST INTERESTS OF NORTHSTAR AND THE NORTHSTAR
SHAREHOLDERS AND NORTHSTAR OPTIONHOLDERS AND UNANIMOUSLY RECOMMENDS THAT THE
NORTHSTAR SHAREHOLDERS AND NORTHSTAR OPTIONHOLDERS VOTE IN FAVOR OF THE
ARRANGEMENT RESOLUTION.
Solicitation and Voting of Proxies. The accompanying proxy is solicited on
behalf of the management of Northstar for use at the Northstar Meeting.
Corporate Shareholder Services Inc., proxy solicitation and information agent,
has been employed to solicit proxies by mail, telephone or personal solicitation
for a fee of approximately Cdn. $10,000 plus expenses. Proxies may also be
solicited personally or by telephone by regular employees of Northstar without
special compensation. The cost of solicitation will be borne by Northstar.
Northstar may also pay brokers or nominees holding Northstar Common Shares in
their names or in the names of their principals for their reasonable expenses in
sending solicitation material to their principals. This Joint Proxy Statement
and the accompanying form of proxy were first mailed to Northstar Shareholders
and Northstar Optionholders on or about November 6, 1998.
Only holders of record of Northstar Common Shares or Northstar Options at
the close of business on the Northstar Record Date will be entitled to vote at
the Northstar Meeting, subject to the provisions of the ABCA regarding transfers
of Northstar Common Shares after the Northstar Record Date. See the "Notice of
Special Meeting of Shareholders and Optionholders" accompanying this Joint Proxy
Statement. At the close of business on the Northstar Record Date, there were
68,486,352 Northstar Common Shares outstanding and 5,520,345 Common Shares
subject to outstanding Northstar Options.
The quorum at the Northstar Meeting will be four persons present in person
or representing by proxy issued shares of Northstar representing not less than
5% of the votes entitled to be cast at such meeting. Pursuant to the Interim
Order, the vote required to approve the Arrangement Resolution is not less than
66 2/3% of the aggregate votes actually cast by the Northstar Shareholders and
Northstar Optionholders, voting together (not counting for this purpose
abstentions, spoiled votes, illegible votes and/or defective votes). For these
purposes each Northstar Common Share carries one vote, and each Northstar Option
carries the number of votes equal to the number of Northstar Common Shares
subject to the Northstar Option.
A proxy, in order to be acted upon at the Northstar Meeting (or any
adjournment or postponement of the Northstar Meeting) must: (i) be received by
Northstar at the registered office of Northstar (as set forth in this Joint
Proxy Statement) or by CIBC Mellon Trust Company at its principal transfer
office in Calgary, at Suite 600, 333-7th Avenue S.W., Calgary, Alberta, Canada
T2P 2Z1 not later than 5:00 p.m. (local time) on the day preceding the Northstar
Meeting (or any adjournment or postponement thereof); or (ii) be deposited with
the scrutineers for the attention of the Chairman at the Northstar Meeting (or
any adjournment or postponement thereof).
Appointment of Proxy and Discretionary Authority. A NORTHSTAR SHAREHOLDER
OR NORTHSTAR OPTIONHOLDER HAS THE RIGHT TO APPOINT A PERSON (WHO NEED NOT BE A
NORTHSTAR SHAREHOLDER OR NORTHSTAR OPTIONHOLDER), OTHER THAN THE PERSONS
DESIGNATED IN THE FORM OF PROXY ACCOMPANYING THIS JOINT PROXY STATEMENT, AS
NOMINEE TO ATTEND AND ACT FOR AND ON BEHALF OF SUCH SHAREHOLDER OR OPTIONHOLDER
AT THE NORTHSTAR MEETING AND MAY EXERCISE SUCH RIGHT BY INSERTING THE NAME OF
SUCH PERSON IN THE BLANK SPACE PROVIDED ON THE FORM OF PROXY.
71
<PAGE> 78
The Northstar Common Shares and Northstar Options represented by proxies at
the Northstar Meeting will be voted in accordance with the instructions of the
Northstar Shareholder and Northstar Optionholder on any ballot that may be
called for and, where the person whose proxy is solicited specifies a choice
with respect to any matter to be voted upon, such person's Northstar Common
Shares or Northstar Options shall be voted in accordance with the specifications
so made.
IF A NORTHSTAR SHAREHOLDER OR NORTHSTAR OPTIONHOLDER APPOINTS A PERSON
DESIGNATED BY MANAGEMENT IN THE PROXY AS NOMINEE AND DOES NOT DIRECT THE
MANAGEMENT NOMINEE TO VOTE EITHER FOR OR AGAINST THE MATTER OR MATTERS WITH
RESPECT TO WHICH AN OPPORTUNITY TO SPECIFY HOW THE SHARES OR OPTIONS REGISTERED
IN THE NAME OF SUCH SHAREHOLDER OR OPTIONHOLDER SHALL BE VOTED, THE PROXY SHALL
BE VOTED FOR SUCH MATTER OR MATTERS PROPOSED IN THIS JOINT PROXY STATEMENT.
THE FORM OF PROXY ACCOMPANYING THIS JOINT PROXY STATEMENT CONFERS
DISCRETIONARY AUTHORITY UPON THE PROXY NOMINEES WITH RESPECT TO AMENDMENTS OR
VARIATIONS TO THE MATTERS IDENTIFIED IN THE ACCOMPANYING NOTICE OF THE NORTHSTAR
MEETING AND OTHER MATTERS WHICH MAY PROPERLY COME BEFORE THE NORTHSTAR MEETING.
Northstar management knows of no matters to come before the Northstar Meeting
other than the matters referred to in the accompanying Notice of the Northstar
Meeting. However, if any other matters which are not now known to management
should properly come before the Northstar Meeting, the Northstar Common Shares
and Northstar Options represented by proxies in favor of management nominees
will be voted on such matters in accordance with the best judgment of the proxy
nominee.
Revocation of Proxies. Proxies given by Northstar Shareholders or Northstar
Optionholders for use at the Northstar Meeting may be revoked at any time prior
to their use. A Northstar Shareholder or Northstar Optionholder giving a proxy
may revoke the proxy: (i) by instrument in writing executed by the Northstar
Shareholder or Northstar Optionholder or by such person's attorney authorized in
writing, or, if the Northstar Shareholder or Northstar Optionholder is a
corporation, under its corporate seal by an officer or attorney thereof duly
authorized indicating the capacity under which such officer or attorney is
signing, and deposited at the registered office of Northstar (as set forth in
this Joint Proxy Statement) or with CIBC Mellon Trust Company at its principal
transfer office in Calgary at Suite 600, 333-7th Avenue S.W. Calgary, Alberta,
Canada T2P 2Z1 not later than 5:00 p.m. (local time), in each case on the
business day preceding the day of the Northstar Meeting, or any adjournment or
postponement thereof, or with the scrutineers of the Northstar Meeting for the
attention of the Chairman of the Northstar Meeting on the day of such Northstar
Meeting or adjournment or postponement thereof; (ii) by a duly executed and
deposited proxy bearing a later date or time than the date or time of the proxy
being revoked; (iii) by voting in person at the Northstar Meeting (although
attendance at the Northstar Meeting will not in and of itself constitute a
revocation of a proxy); or (iv) in any other manner permitted by law.
Auditors. Deloitte & Touche, chartered accountants, have served as
Northstar's auditors since 1989. Representatives of Deloitte & Touche plan to
attend the Northstar Meeting and will be available to answer appropriate
questions. Its representatives will also have an opportunity to make a statement
at the meeting if they so desire, although it is not expected that any statement
will be made.
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<PAGE> 79
THE COMBINATION
BACKGROUND
In view of the ongoing consolidation in the North American oil and gas
industry, Northstar has from time to time considered the possibility of a
strategic transaction with a United States-based oil and gas company. Northstar
believed this strategy would bring the advantages of increased access to capital
markets, ability to deploy resources to the areas of greatest opportunity and
increased access to broader and more diverse commodity markets. Similarly, Devon
has from time to time considered the possibility of a strategic transaction with
a Canadian-based oil and gas company in order to increase the size of Devon's
Canadian operations and provide Devon with greater access to Canadian gas
markets and exploration potential.
In early 1998, Northstar retained Morgan Stanley for the purpose of
advising Northstar on the mergers and acquisitions market in North America and
to advise Northstar generally on strategic alternatives. The strategic
alternatives considered included financial restructurings, asset sales,
acquisitions, joint ventures and farm-in arrangements and a review of potential
candidates for a strategic, cross-border merger transaction. During Northstar's
review of strategic alternatives, Devon consistently was identified as an
attractive transaction candidate should Northstar determine to explore a
strategic transaction.
Before and after its retention of Morgan Stanley, Northstar received a
number of unsolicited preliminary inquiries from United States-based companies
regarding Northstar's level of interest in exploring potential strategic
transactions. Morgan Stanley also made a number of confidential inquiries to
gauge the level of interest among some of the companies, including Devon,
identified as the best of potential transaction partners. However, over time,
these potential candidates were dismissed for a variety of reasons, including
perceived lack of strategic fit, excessive debt levels or lack of commitment of
the other party. Morgan Stanley made such inquiries to Devon in March, 1998.
Devon indicated that it was not, at the time, a potential candidate for a
transaction with Northstar because it was devoting significant management time
to a possible transaction with another company.
In early June 1998, Morgan Stanley again approached Devon to discuss
Devon's level of interest in a potential strategic transaction with Northstar.
By this time, talks between Devon and the other company had terminated because
the other company had announced a transaction with a third party. Therefore
Devon indicated an interest in pursuing the possibility of a transaction with
Northstar. As a result, an initial meeting between Northstar's President and
Chief Executive Officer, John A. Hagg, and Executive Vice President and Chief
Financial Officer, John Richels, and Devon's President and Chief Executive
Officer, J. Larry Nichols, and Vice President -- Corporate Development, H. Allen
Turner, was held on June 12, 1998 in Chicago. At that meeting the concept of a
strategic business combination was discussed. The parties agreed to continue
discussions and to conduct due diligence on an expedited basis.
Following the execution of confidentiality agreements, representatives of
the parties met in Calgary and Oklahoma City during the weeks of June 15, 1998
and June 22, 1998, to exchange information and conduct due diligence. In
addition, during the week of June 15, 1998, RBC DS was added to Northstar's
advisory team to advise Northstar on the Canadian mergers and acquisitions
market, Northstar's strategic alternatives and on any proposed business
combination that resulted from the ongoing discussions between Devon and
Northstar. Morgan Stanley and RBC DS were selected by Northstar to provide
financial advisory services based on their expertise in the mergers and
acquisitions and corporate finance markets in the United States and Canada,
respectively. At the time of its initial approaches to Morgan Stanley and RBC
DS, Northstar had no knowledge of any previous advisory relationships with Devon
and, accordingly, gave no consideration to those relationships. At the time
Devon was suggested as a potential transaction partner, Morgan Stanley and RBC
DS both advised Northstar that they had recently provided financial advisory
services to Devon in an unrelated matter. However, both Morgan Stanley and RBC
DS confirmed that no continuing advisory relationship existed that would give
rise to a conflict of interest. Also during the week of June 15, 1998, Devon
retained Merrill Lynch to render a fairness opinion to the Devon Board in
connection with any proposed transaction that resulted from the ongoing
discussions between Devon and Northstar. On June 23 and 24, 1998, Morgan Stanley
and RBC DS made presentations to the Northstar Board regarding the North
73
<PAGE> 80
American mergers and acquisitions market and the level of interest in and
qualifications of other potential transaction partners. Morgan Stanley and RBC
DS also reviewed several Northstar evaluation models with the Northstar Board,
presented their analysis of Devon's historical and comparative stock price
performance, provided a pro forma analysis of the proposed Combination, analyzed
the Combination in relation to other precedent corporate transactions in the oil
and gas industry and commented on the differences between pooling of interests
method and purchase method of accounting for the potential transaction.
During the period between June 15 and June 26, 1998, representatives of
Northstar, led by Messrs. Hagg and Richels, and executives of Devon, led by Mr.
Nichols, held numerous discussions concerning the terms of a possible business
combination. During this period, representatives of Devon and Northstar assessed
the relative contribution of each company through the proposed combination. That
contribution assessment was based on the contribution to earnings, reserves,
cash flow, undeveloped land and other operational factors of the two companies.
As a result of that assessment, a preliminary exchange ratio of 0.2239:1 was
proposed by Devon as a basis on which the parties would be willing to continue
negotiations and to attempt to reach a definitive agreement, subject to board
approvals. The preliminary exchange ratio was reviewed with the Northstar Board
on June 24, 1998, at which time the possibility of increasing the Exchange Ratio
in the event of a decrease in the trading price of Devon Common Stock or an
increase in the $Cdn./$U.S. exchange rate was discussed. Following that meeting,
Northstar representatives suggested that the contribution model did not
appropriately reflect prices for Canadian natural gas and, upon a further review
of those prices, Devon agreed to increase the Exchange Ratio to 0.227:1. In
addition, based on the discussions at the June 24, 1998 meeting of the Northstar
Board, Northstar representatives asked Devon to consider increasing the Exchange
Ratio in the event of a decrease in the trading price of Devon Common Stock or
an increase in the $Cdn./$U.S. currency exchange rate. Devon agreed to a formula
that would increase the Exchange Ratio to a maximum of 0.235:1 in such event,
and the parties proceeded to submit the revised Exchange Ratio to their
respective boards for approval.
On June 26, 1998, the Devon Board met to review the progress of the
discussions with Northstar to date. At that meeting, Devon management summarized
the terms of the proposed transaction with Northstar. Merrill Lynch then made a
presentation to the Devon Board regarding the proposed transaction. The
presentation by Merrill Lynch to the Devon Board included: an overview of
certain operating and market data with respect to Northstar and Devon; an
overview of the current oil and gas environment; a description of Northstar
including a summary of Northstar's areas of operations, proved reserves,
undeveloped acreage, historical production, discretionary cash flow, historical
financials, historical stock price performance, management and board member
listing, and shareholder breakdown; a summary of the terms of the transaction; a
preliminary valuation analysis; and the projected financial impact of the
Combination on Devon. In addition, Merrill Lynch discussed the strategic
rationale for the Combination. The significant points noted by Merrill Lynch
were that the Combination (a) establishes Canada as a significant core area for
Devon; (b) provides both significant short-term cash flow and attractive upside
potential to Devon; (c) gives Devon a strong management team in Canada; (d)
enhances Devon's natural gas reserves; (e) adds leverage to Devon's balance
sheet, thereby lowering Devon's cost of capital; (f) increases Devon's stock
market liquidity by increasing the shares outstanding held by the public; and
(g) should be additive to both earnings and cash flow per share. Merrill Lynch
concluded by advising the Devon Board that the proposed Exchange Ratio was fair
from a financial point of view to Devon. The Devon Board then approved the
proposed transaction, subject to completion of a satisfactory definitive
agreement.
Following the Devon Board meeting on June 26, 1998, Devon submitted a
letter to Northstar which set forth Devon's proposal for the principal terms of
the transaction. Following receipt of this letter, the Northstar Board met to
consider Devon's proposal. Morgan Stanley and RBC DS made a presentation to the
Northstar Board analyzing the Devon offer and indicating that the value to
Northstar Shareholders of the offer, based on the closing price of the Devon
Common Stock on the AMEX on that date and the $Cdn./$U.S. exchange rate, was
Cdn. $12.17 per Northstar share. Morgan Stanley and RBC DS also compared the
offer to other comparable merger and acquisition transactions in the Canadian
oil and gas sector and explained the evaluation methodology employed in reaching
their conclusions. See "-- Opinions of Financial Advisors -- Opinion of Morgan
Stanley" and "-- Opinions of Financial Advisors -- Opinion of RBC DS." The
Northstar Board then approved the proposed transaction, subject to completion of
a satisfactory definitive agreement.
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From June 26 through June 29, 1998, the parties and their legal counsel
completed negotiation of the terms of agreements for the Combination. The
Combination Agreement was originally executed on June 29, 1998, and public
announcements were made by the parties. Subsequent to June 29, 1998, certain
shareholders of Northstar and Devon, including Kerr-McGee, executed the
Northstar Shareholder Agreements, Northstar Affiliates' Agreements, Devon
Stockholder Agreements and Devon Affiliates' Agreements. Also, subsequent to
June 29, 1998, the parties discussed and agreed upon various technical and
clarifying modifications to the Combination Agreement as executed on June 29,
1998 (including the elimination of certain termination rights that might have
become exercisable by Northstar or Devon if these agreements had not been
executed), and the Combination Agreement, as amended and restated to reflect
such modifications, was executed and delivered on July 28, 1998.
REASONS FOR THE COMBINATION
Each of Devon and Northstar believes that the Combination will allow the
two companies to enhance their ability to increase the size and value of their
assets. Each of the boards of directors of Devon and Northstar have unanimously
approved the proposed Combination.
Devon's Reasons for the Combination. The Devon Board considered various
factors, including the following, in unanimously approving the Combination.
1. Establish Critical Mass in Canada. Devon believes it does not
currently possess a large enough property base in Canada to be a strong
competitive force in Canada, either from an operating or employee
recruitment viewpoint. After the Combination, Devon believes that it would
be of sufficient size to enjoy a fuller range of opportunities of doing
business in Canada. This, in turn should enable Devon, through its
Northstar subsidiary, to have a significant presence in the Canadian oil
and gas industry.
2. Gain Additional Exposure to Possibly Improving Canadian Gas
Markets. Over the last four years limited pipeline capacity has restricted
access of Canadian gas to major U.S. markets. As a result, the
"differential" (i.e., the difference between the gas price in a specific
region and the gas price at a central delivery point, such as the Henry
Hub) in Canada, has been greater and more volatile than in Devon's markets
in the U.S. However, the Maritimes and Northeast pipeline (being built by a
variety of entities including Mobil Oil Corporation and Nova Scotia Power),
Northern Border pipeline (being built by a variety of entities including
Enron Corporation, Duke Energy, TransCanada Pipelines and the Williams
Companies) and the TransCanada pipeline (being built by TransCanada
Pipelines), all currently under construction or expansion, will provide
increased transportation capacity for natural gas out of Canada. Completion
of these lines, all of which are scheduled during the next year, could
cause differentials to improve. The Devon Board believes this to be an
appropriate time to increase Devon's exposure to natural gas reserves and
prices in Canada. Additionally, when this new transportation capacity is
available, it could allow the possibility of new exploration and
exploitation opportunities on projects that have not been developed in
Canada due to lack of access to gas markets. A significant portion of
Northstar's 1.6 million net undeveloped acres is located in areas of Canada
that would benefit from the increased capacity created by the new pipelines
and pipeline expansions.
3. Increase Financial Size. After the Combination is completed, Devon
will have made a significant acquisition and believes it will still have
maintained a strong balance sheet to make future capital expenditures.
Based on October 28, 1998 market prices, Devon's equity market
capitalization after the Combination would be approximately $1.6 billion,
and its long-term debt would be about $325 million. This compares with a
pre-Combination equity market capitalization of $1.1 billion as of October
28, 1998, and no long-term debt.
4. Expand Shareholder Base. There is potential to increase the number
of institutional investors that follow Devon. With its expanded property
base in Canada and the legal structure of "cross-border" Exchangeable
Shares, Devon will increase its opportunities to attract Canadian
shareholders. With the issuance of the equivalent of approximately 15.5
million shares of Devon Common Stock to Northstar Shareholders, Devon's
"public float" (i.e., shares held by non-affiliates) could expand by as
much as 70%. This could help increase liquidity for Devon's Common Stock.
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5. Enlarge and Enhance Devon's Canadian Staff. One of the major
attractions of Northstar to Devon was the Northstar management team. Devon
believes that it is important to have such substantial Canadian assets
managed by a large, experienced Canadian staff. In addition, Devon expects
to be able to assimilate this transaction with minimal impact on Devon's
existing staff and operations. Devon has had discussions with all of the
senior officers of Northstar. While Devon has not received contractual
commitments from the senior officers, all but one have indicated that they
intend to remain at Northstar following the Combination. Northstar's Chief
Financial Officer, John Richels, has indicated that he will leave Northstar
after the Effective Date to return to the practice of law. However, Mr.
Richels has agreed to join the Northstar Board following the completion of
the Combination. Devon and Northstar do not expect that Mr. Richels'
departure will materially impact their overall assessment of the benefits
of the Combination. Devon intends to negotiate employment arrangements with
the remaining senior officers on terms consistent with existing Devon
employment agreements. All of the Northstar senior officers have indicated
a willingness to negotiate such arrangements and Devon believes that it
will be successful in reaching satisfactory agreements with all of such
officers.
6. Acquire Quality Properties. Based upon a review of Northstar's
production, history and reserve reports, Devon believes that the Northstar
properties are quality assets with low operating costs. While Devon's
properties are concentrated in Central Alberta, Northstar's properties are
located throughout Alberta, southern Saskatchewan and eastern British
Columbia. Thus, Northstar's properties bring Devon an immediate entree into
other significant oil and gas regions of Canada.
In reaching its determination, the Devon Board also considered and
evaluated information discussed with the Devon Board by the management of Devon
with respect to the Combination. In this regard, the Devon Board considered,
among other things: (i) information concerning the results of operations,
performance, financial condition and prospects of Devon and Northstar on a
company-by-company basis, and on a combined basis; (ii) the reserve levels,
asset quality and cost structure of Devon's and Northstar's businesses; (iii)
the results and scope of the due diligence review conducted by members of
Devon's management with respect to Northstar's business and operations; (iv)
information with respect to recent and historical trading prices and trading
multiples of Devon Common Stock and Northstar Common Shares; and (v) information
with respect to recent and historical prices and a range of potential future
price trends of oil and gas and the potential impact thereof on each of Devon
and Northstar and the combined entity.
The Devon Board also considered: (i) the terms of the Combination Agreement
and the other agreements contemplated thereby; (ii) the structure of the
Combination including the expectation that the Combination would be accounted
for as a pooling-of-interests under U.S. GAAP; (iii) the tax consequences of the
Combination; (iv) the presentation by, and the opinion of, Merrill Lynch as
described below; (v) the judicial and regulatory approval requirements,
including approval by the Court; and (vi) the fact that the Devon Stockholders
would retain between 67% and 68% of the equity of the combined company,
depending upon the final Exchange Ratio. With respect to (ii), the
pooling-of-interests accounting treatment, the Devon Board reviewed this
accounting treatment in light of the purchase method of accounting which Devon
had used for all of its previous acquisition and merger transactions. The Devon
Board considered the fact that under the pooling-of-interests method, the
assets, liabilities, shareholders' equity and operating results of Northstar and
Devon for all previous periods will be restated to combine the separate accounts
of the two companies. Devon will carry the combined historical amounts forward
and neither Devon nor Northstar will recognize any increase in the book value of
their assets or liabilities in connection with the Combination. With respect to
(iii), the tax consequences of the Combination, the Devon Board considered the
fact that the Combination structure is tax deferred to the Northstar
Shareholders in Canada. In addition, the Devon Board considered the fact that
Devon's future Canadian income taxes would be minimized.
Based on all of these matters, and such other matters as the members of the
Devon Board deemed relevant, the Devon Board unanimously approved the
Combination Agreement and the Combination, including the proposed Certificate
Amendment.
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THE DEVON BOARD BELIEVES THAT THE COMBINATION AGREEMENT IS IN THE BEST
INTERESTS OF THE DEVON STOCKHOLDERS AND UNANIMOUSLY RECOMMENDS THAT THE DEVON
STOCKHOLDERS APPROVE THE COMBINATION AGREEMENT AND THE COMBINATION.
The foregoing discussion of the information and factors considered and
given weight by the Devon Board is not intended to be exhaustive but is believed
to include all material factors considered by the Devon Board. In addition, in
reaching the determination to approve and recommend to Devon Stockholders
approval of the Combination, the Devon Board did not assign any relative or
specific weights to the foregoing factors which were considered, and individual
directors may have given differing weights to different factors.
The Devon Board realized that there are certain risks associated with the
Combination, including that some of the potential benefits set forth above may
not be realized or that there may be high costs associated with realizing such
benefits. The Devon Board also considered factors such as the ability to retain
Northstar's management and key employees, the volatility of oil and gas prices,
the relative volatility of both companies' stock prices, the uncertainty in
estimating oil and gas reserves, future exploration and development risk, and
the risks of conducting business in a foreign country. These factors are
discussed more fully in this Joint Proxy Statement under "Risk Factors."
However, the Devon Board believes that the positive factors should outweigh any
negative factors, although there can be no assurances in this regard.
The price of Devon Common Stock has declined since the Devon Board approved
the Combination. In addition, natural gas prices have declined and oil prices
have remained low. However, the declines have affected Devon, Northstar and the
industry generally. Accordingly, Devon believes that these changes have not
materially affected the fairness of the Exchange Ratio to the Devon
Stockholders.
Northstar's Reasons for the Combination. The Northstar Board considered
several factors, including the following, in unanimously approving the
Combination.
1. Premium to Trading Price. The consideration offered under the
Combination represented a premium of approximately 26% over the closing
price of the Northstar Common Shares reported on the TSE on June 26, 1998,
the last trading day of such shares prior to the first public announcement
of the Combination, and a premium of approximately 32% over the weighted
average closing price of the Northstar Common Shares for the 20 trading day
period prior to the first public announcement of the Combination.
2. Improved Balance Sheet. Northstar is currently constrained in
pursuing opportunities as a result of reduced financial flexibility created
through its highly-leveraged position. Devon's lack of debt and strong
balance sheet results in a combined company with market capitalization
based on current prices of approximately $1.8 billion and with debt of
approximately $325 million. As a result, the Northstar Board is of the view
that the strong financial position of the continuing company should allow
it to more actively pursue Northstar's opportunity base and seek to fully
develop its potential for Northstar Shareholders and Northstar
Optionholders.
3. Ability to Participate in Development of Northstar's
Properties. Following the Combination, Northstar Shareholders, through
their ownership of Exchangeable Shares or shares of Devon Common Stock,
will own the equivalent of 32% of the Devon Common Stock. Accordingly, the
Combination provides the Northstar Shareholders and Northstar Optionholders
with the opportunity to participate in a meaningful way in the ongoing
development of Northstar's properties as well as to participate in Devon's
properties and to participate in any future improvement in commodity
prices.
4. Interest in Larger Entity with Property Holdings Balanced Between
the United States and Canada. Northstar Shareholders will acquire an
interest in Devon which, when combined with Northstar's operations, will be
a large North American independent oil and gas producer. Following the
Combination, the combined company's assets will be relatively equally
balanced between the United States and Canada, which should enhance its
competitive position in both countries and permit it to allocate its
resources to take advantage of attractive opportunities in both countries.
5. Management. The combined company should benefit from the leadership
of Devon's senior management. This team, led by J. Larry Nichols, has a
track record of successfully developing and managing a rapidly growing,
profitable oil and gas company over a number of years. Additionally, Devon
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has indicated that management of Northstar would continue to play a leading
role in the management of the combined company's Canadian operations and
that two directors of Northstar would become directors of Devon, providing
for continuity of management of Northstar's business for the benefit of the
combined company.
6. Increased Liquidity. Devon Common Stock is actively traded in the
United States on the AMEX. The Northstar Board believes that holding
Exchangeable Shares, which are exchangeable for shares of Devon Common
Stock, should provide Northstar Shareholders and Northstar Optionholders
with increased liquidity.
7. Tax Deferral. Northstar Shareholders who are Canadian residents and
who hold their Northstar Common Shares as capital property will generally
be able to exchange their Northstar Common Shares for Exchangeable Shares
under the Combination on a tax deferred basis under Canadian federal income
tax legislation.
8. Ability to Consider Competing Offers. The Combination Agreement
does not preclude the initiation of competing offers by other potential
suitors. If another offer is received by Northstar, the Northstar Board may
consider and accept the offer if the offer is financially superior to the
transactions contemplated by the Combination and the offeror has
demonstrated that the funds or other considerations necessary for the offer
are reasonably likely to be available. The offer may, however, only be
accepted by the Northstar Board if the Northstar Board has concluded in
good faith that the acceptance of the offer is necessary for the Northstar
Board to act in a manner consistent with its fiduciary duties under
applicable law. A superior offer may only be considered and accepted by
Northstar until such time as the Arrangement has been approved by the
Northstar Shareholders and the Northstar Optionholders. If a competing
offer is accepted by the Northstar Board, Northstar is required to pay
Devon a cash termination fee of Cdn. $23 million. As of the date hereof,
Northstar has not received any competing offers.
9. Dissent Rights. Under the Arrangement, the Northstar Shareholders
and Northstar Optionholders have the right to dissent.
In reaching its determination, the Northstar Board also considered and
evaluated information presented by the management of Northstar with respect to
the Combination. In this regard, the Northstar Board considered, among other
things: (i) information concerning the results of operations, performance,
financial condition and prospects of and the opportunities available to Devon
and Northstar on a company-by-company basis, and on a combined basis, and the
risks involved in achieving the full potential of Northstar on a stand-alone
basis; (ii) the reserve levels, asset quality and cost structure of Devon's and
Northstar's business; (iii) the results and scope of the due diligence review
conducted by Northstar's management with respect to Devon's business and
operations; (iv) information with respect to recent and historical trading
prices and trading multiples of Devon Common Stock and Northstar Common Shares;
and (v) information with respect to recent and historical prices and a range of
potential future price trends of oil and gas and the potential impact thereof on
each of Devon and Northstar and the combined entity.
The Northstar Board also considered the terms of the Combination Agreement
and the Exchangeable Shares, with a view, among other things, to assuring that
holding an Exchangeable Share would be the economic equivalent of holding a
share of Devon Common Stock.
The Northstar Board considered the presentations by and the opinions of
Morgan Stanley and RBC DS described below, with respect to, in the case of
Morgan Stanley, the fairness of the Consideration (as defined below, see
"-- Opinion of Morgan Stanley") to be received pursuant to the Combination
Agreement in the aggregate, from a financial point of view, to holders of
Northstar Common Shares and Northstar Options, and in the case of RBC DS, the
fairness from a financial point of view of the Arrangement to holders of
Northstar Common Shares and Northstar Options.
Based on all of these matters, and such other matters as the members of the
Northstar Board deemed relevant, the Northstar Board unanimously approved the
Combination Agreement and the Combination.
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THE NORTHSTAR BOARD BELIEVES THAT THE COMBINATION IS IN THE BEST INTERESTS
OF THE NORTHSTAR SHAREHOLDERS AND NORTHSTAR OPTIONHOLDERS AND UNANIMOUSLY
RECOMMENDS THAT THE NORTHSTAR SHAREHOLDERS AND NORTHSTAR OPTIONHOLDERS VOTE IN
FAVOR OF THE ARRANGEMENT RESOLUTION.
The foregoing discussion of the information and factors considered and
given weight by the Northstar Board is not intended to be exhaustive but is
believed to include all material factors considered by the Northstar Board. In
addition, in reaching the determination to approve and recommend the Combination
Agreement, the Northstar Board did not assign any relative or specific weights
to the foregoing factors which were considered, and individual directors may
have given differing weights to different factors.
The Northstar Board realized that there are certain risks associated with
the Combination, including that some of the potential benefits set forth above
may not be realized or that there may be high costs associated with realizing
such benefits. The Northstar Board also considered factors such as Devon's
ability to retain Northstar's management and key employees, the volatility of
oil and gas prices, the relative volatility of both companies' stock prices, the
uncertainty in estimating oil and gas reserves, future exploration and
development risk and the risks of conducting business in a foreign country.
These factors are discussed more fully in this Joint Proxy Statement under the
heading "Risk Factors". However, the Northstar Board believes that the factors
in favor of the Combination outweigh the risks and potential disadvantages,
although there can be no assurance in this regard.
The price of Devon Common Stock has declined since the Northstar Board
approved the Combination. In addition, natural gas prices have declined and oil
prices have remained low. However, the declines have affected Devon, Northstar
and the industry generally. Accordingly, Northstar believes that these changes
have not materially affected the fairness of the Exchange Ratio to the Northstar
Shareholders or the Northstar Optionholders.
OPINIONS OF FINANCIAL ADVISORS
Opinion of Merrill Lynch
Devon retained Merrill Lynch to issue a fairness opinion in connection with
the Combination. On June 26, 1998, Merrill Lynch rendered the Merrill Lynch
Opinion (subsequently confirmed in writing on June 29, 1998) that, as of the
date thereof and based upon and subject to the factors and assumptions set forth
therein, the Exchange Ratio was fair from a financial point of view to Devon.
THE FULL TEXT OF THE MERRILL LYNCH OPINION, WHICH SETS FORTH THE
ASSUMPTIONS MADE, MATTERS CONSIDERED, QUALIFICATIONS AND LIMITATIONS ON THE
REVIEW UNDERTAKEN BY MERRILL LYNCH IS ATTACHED AS ANNEX H TO THIS JOINT PROXY
STATEMENT. THE SUMMARY OF THE MERRILL LYNCH OPINION SET FORTH IN THIS JOINT
PROXY STATEMENT IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO THE FULL TEXT OF
SUCH OPINION. THE MERRILL LYNCH OPINION WAS PROVIDED TO THE DEVON BOARD FOR ITS
INFORMATION AND IS DIRECTED ONLY TO THE FAIRNESS FROM A FINANCIAL POINT OF VIEW
OF THE EXCHANGE RATIO TO DEVON, DOES NOT ADDRESS THE MERITS OF THE UNDERLYING
DECISION BY DEVON TO ENGAGE IN THE COMBINATION AND DOES NOT CONSTITUTE A
RECOMMENDATION TO ANY SHAREHOLDER OF DEVON OR NORTHSTAR AS TO HOW SUCH
SHAREHOLDER SHOULD VOTE ON THE PROPOSED COMBINATION OR ANY MATTER RELATED
THERETO.
Merrill Lynch has consented to the use of Annex H containing the Merrill
Lynch Opinion, in this Joint Proxy Statement and to the references to Merrill
Lynch under the headings "Summary" and "The Combination" in this Joint Proxy
Statement. In giving such consent, Merrill Lynch does not admit that it comes
within the category of persons whose consent is required under Section 7 of the
Securities Act or the rules and regulations of the SEC promulgated thereunder,
nor does Merrill Lynch admit that it is an expert with respect to any part of
any registration statement in which the Merrill Lynch Opinion is referred to
within the meaning of the term "experts" as used in the Securities Act or the
rules and regulations of the SEC promulgated thereunder.
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The Exchange Ratio was determined through negotiations between Northstar
and Devon and was unanimously approved by the Devon Board. Merrill Lynch did not
make a recommendation to the Devon Board with respect to the Exchange Ratio. The
Merrill Lynch Opinion was necessarily based upon market, economic and other
conditions as they existed and could be evaluated on, and on the information
made available to Merrill Lynch as of the date of the Merrill Lynch Opinion.
Merrill Lynch assumed that in the course of obtaining the necessary regulatory
or other consents or approvals (contractual or otherwise) for the Combination,
no restrictions, including any divestiture requirements or amendments or
modifications, will be imposed that will have a material adverse effect on the
contemplated benefits of the Combination.
The summary set forth below does not purport to be a complete description
of the analyses underlying the Merrill Lynch Opinion or the presentation made by
Merrill Lynch to the Devon Board. The preparation of a fairness opinion is a
complex analytic process involving various determinations as to the most
appropriate and relevant methods of financial analysis and the application of
those methods to the particular circumstances and, therefore, such an opinion is
not readily susceptible to partial analysis or summary description. Accordingly,
Merrill Lynch believes that its analyses must be considered as a whole and that
selecting portions of its analyses, without considering all analyses, would
create an incomplete view of the process underlying its opinion. Merrill Lynch
considered the results of all such analyses and did not assign relative weights
to its analyses in preparing its opinion.
In performing its analyses, Merrill Lynch made numerous assumptions with
respect to industry performance, general business, economic, market and
financial conditions and other matters, many of which are beyond the control of
Devon or Northstar. Any estimates contained in the analyses performed by Merrill
Lynch are not necessarily indicative of actual values or future results, which
may be significantly more or less favorable than suggested by such analyses.
Additionally, estimates of the value of businesses or securities do not purport
to be appraisals or to reflect the prices at which such businesses or securities
might actually be sold. Accordingly, such analyses and estimates are inherently
subject to substantial uncertainty. In addition, as described above, the Merrill
Lynch Opinion delivered to the Devon Board and Merrill Lynch's presentation to
the Devon Board were among several factors taken into consideration by the Devon
Board in making its determination to approve the Combination Agreement.
Consequently, the Merrill Lynch analyses described below should not be viewed as
determinative of the decision of the Devon Board or Devon's management with
respect to the fairness of the Exchange Ratio.
In arriving at the Merrill Lynch Opinion, Merrill Lynch among other things:
(i) reviewed certain publicly available business and financial information
relating to Northstar and Devon that Merrill Lynch deemed to be relevant; (ii)
reviewed the Northstar Reserve Reports; (iii) reviewed the Devon Reserve
Reports; (iv) reviewed certain information, including financial forecasts,
relating to the business, earnings, cash flow, assets, liabilities and prospects
of Northstar and Devon, as well as the amount and timing of the cost savings and
related expenses expected to result from the Combination furnished to Merrill
Lynch by Northstar and Devon, respectively; (v) conducted discussions with
members of senior management of Northstar and Devon concerning the matters
described in clauses (i) through (iv) above as well as their respective
businesses and prospects before and after giving effect to the Combination; (vi)
conducted discussions with representatives of KPMG Peat Marwick LLP, the
independent certified public accountants for Devon and Deloitte & Touche,
independent chartered accountants of Northstar; (vii) reviewed the market prices
and valuation multiples for Northstar Common Shares and Devon Common Stock and
compared them with those of certain publicly traded companies that Merrill Lynch
deemed to be relevant; (viii) reviewed the results of operations of Northstar
and Devon and compared them with those of certain publicly traded companies that
Merrill Lynch deemed to be relevant; (ix) compared the proposed financial terms
of the Combination with the financial terms of certain other transactions which
Merrill Lynch deemed to be relevant; (x) reviewed the potential pro forma impact
of the Combination; (xi) reviewed a draft of the Combination Agreement,
including a draft of the Plan of Arrangement; and (xii) reviewed such other
financial studies and analyses and took into account such other matters as
Merrill Lynch deemed necessary, including Merrill Lynch's assessment of general
economic, market and monetary conditions.
In preparing the Merrill Lynch Opinion, Merrill Lynch assumed and relied on
the accuracy and completeness of all information supplied or otherwise made
available to it, discussed with or reviewed by or for
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it, or publicly available. Merrill Lynch did not assume any responsibility for
independently verifying such information or undertaking an independent
evaluation or appraisal of any of the assets or liabilities of Northstar or
Devon. Merrill Lynch was not furnished with any evaluation or appraisal other
than the Devon Reserve Reports and the Northstar Reserve Reports. In addition,
Merrill Lynch did not conduct any physical inspection of the properties or
facilities of Northstar or Devon. With respect to the financial forecast
information furnished to or discussed with Merrill Lynch by Northstar or Devon,
Merrill Lynch assumed that such forecasts had been reasonably prepared and
reflected the best currently available estimates and judgment of the management
of Northstar or Devon as to the expected future financial performance of
Northstar or Devon, as the case may be. In addition, Merrill Lynch assumed that
the Devon Reserve Reports and the Northstar Reserve Reports had been reasonably
prepared and reflected the best currently available estimates and judgments of
Northstar and Devon and their respective petroleum engineers as to their
respective reserves, their future hydrocarbon production volumes and associated
costs. Merrill Lynch further assumed that the Combination will be accounted for
as a pooling-of-interests under U.S. GAAP. Merrill Lynch also assumed that the
final form of the Combination Agreement, including the Plan of Arrangement,
would be substantially similar to the last draft reviewed by Merrill Lynch. In
addition, Merrill Lynch was not asked to consider, and the Merrill Lynch Opinion
does not in any manner address, the price at which shares of Devon Common Stock
or the Exchangeable Shares will actually trade following consummation of the
Combination. No limitations were imposed by the Devon Board upon Merrill Lynch
with respect to the investigations made or procedures followed by Merrill Lynch
in rendering the Merrill Lynch Opinion.
The following is a summary of the material analyses performed by Merrill
Lynch in connection with the preparation of the Merrill Lynch Opinion.
Discounted Cash Flow Analysis of Northstar. Using a discounted cash flow
("DCF") analysis, Merrill Lynch calculated the present value of the after-tax
future cash flows that Northstar could be expected to generate after July 1,
1998 based upon: (i) the Northstar Reserve Reports; and (ii) oil and gas price
forecasts under two distinct pricing scenarios, Case I and Case II. It should be
noted that the discounted cash flow analysis of Northstar was based in part on
probable reserve estimates included in the Northstar Reserve Reports. Such
probable reserves are not recognized in the SEC definition of reserves.
The natural gas price forecasts were based on Henry Hub equivalent
forecasts for spot market sales and on a standard heating value of 1,000 British
Thermal Units per cubic foot of gas. Adjustments were made to the natural gas
price forecasts to reflect transportation charges and quality differentials. In
Case I, average spot market gas prices per Mcf for the years 1998 to 2002 were
assumed to be $2.52, $2.42, $2.36, $2.27 and $2.27, respectively, and were
assumed to escalate at 4% per annum thereafter. In Case II, average spot market
gas prices per Mcf for the years 1998 to 2002 were assumed to be $2.55, $2.60,
$2.75, $2.90 and $3.00, respectively, and were assumed to escalate at 4% per
annum thereafter. The unadjusted natural gas prices were capped at $6.00 per Mcf
in the later years for both Case I and Case II.
The oil price forecasts were based on West Texas Intermediate ("WTI")
equivalent forecasts for spot market sales. Adjustments were made to the oil
price forecasts to reflect transportation charges and quality differentials. In
Case I, unadjusted average WTI oil prices per Bbl for the years 1998 to 2002
were assumed to be $15.44, $17.43, $17.86, $18.04 and $18.25, respectively, and
were assumed to escalate at 4% per annum thereafter. In Case II, unadjusted
average WTI oil prices per Bbl for the years 1998 to 2002 were assumed to be
$16.50, $18.00, $19.00, $20.00 and $21.00, respectively, and were assumed to
escalate at 4% per annum thereafter. The unadjusted oil prices were capped at
$36.00 per Bbl in the later years for both Case I and Case II.
Production forecasts and associated production costs were supplied by
Northstar. Operating expenses and maintenance capital expenditures necessary to
lift and produce the proved developed, proved undeveloped and probable reserves
estimated in the engineering reports were assumed to increase at a rate of 3%
per annum. The after-tax cash flows were discounted at rates ranging from 8% to
11% for proved developed reserves, from 12% to 15% for proved undeveloped
reserves and from 15% to 20% for probable reserves. The range of discount rates
were based on weighted average cost of capital analyses of comparable companies
in the U.S. and
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Canada, appropriately adjusted for the risks associated with the different oil
and gas reserve classifications (i.e., proved developed, proved undeveloped, and
probable).
By discounting all the after-tax cash flows generated by Northstar's proved
developed, proved undeveloped and probable reserves as of July 1, 1998 and
adding assessed value for undeveloped acreage and other assets, and adjusting
for estimated total debt, proceeds from the exercise of stock options and
working capital, Merrill Lynch arrived at an equity value range for Northstar of
$342.0 million to $477.0 million, or $4.83 to $6.74 per Northstar Common Share
in Case I and $477.0 million to $642.0 million, or $6.74 to $9.07 per Northstar
Common Share in Case II. In each case, per share amounts were determined based
on 67.795 million shares outstanding and the exercise of 2.965 million at- or
in-the-money options.
Discounted Cash Flow Analysis of Devon. Using a DCF analysis, Merrill Lynch
calculated the present value of the after-tax future cash flows that Devon could
be expected to generate after January 1, 1998, based upon (a) the Devon Reserve
Reports and (b) Merrill Lynch's oil and gas price forecasts under the same two
pricing scenarios that were applied to Northstar's reserves, Case I and Case II.
Production forecasts and associated production costs were supplied by
Devon. Operating expenses and maintenance capital expenditures necessary to lift
and produce the proved developed, proved undeveloped and probable reserves
estimated in the engineering reports, were assumed to increase at a rate of 3%
per annum. The after-tax cash flows were discounted at rates ranging from 8% to
11% for proved developed reserves, from 12% to 15% for proved undeveloped
reserves and from 15% to 20% for probable reserves.
By discounting all the after-tax cash flows generated by Devon's proved
developed, proved undeveloped and probable reserves as of January 1, 1998, and
adding assessed value for undeveloped acreage and other assets and adjusting for
estimated total debt, the present value (discounted at 10%) of a tax credit
repurchase, working capital and proceeds from the exercise of stock options,
Merrill Lynch arrived at an equity value range per share for Devon Common Stock
of $910.4 million to $1,090.4 million, or $24.34 to $29.15 per share of Devon
Common Stock in Case I and $1,060.4 million to $1,280.4 million, or $28.35 to
$34.23 per share of Devon Common Stock in Case II. In each case, per share
amounts were determined based on 37.410 million shares of Devon Common Stock
outstanding, including options currently exercisable at- or in-the-money and
approximately 4.9 million shares underlying the Devon trust convertible
preferred securities.
Utilizing the DCF analyses, Merrill Lynch calculated an implied exchange
ratio of 0.198 to 0.231 under Case I and an implied exchange ratio of 0.238 to
0.265 under Case II.
Northstar Comparable Acquisition Analysis. Merrill Lynch analyzed the
financial terms, to the extent publicly available, of 12 selected Canadian
corporate acquisition transactions in the energy industry which were announced
between August 1995 and June 1998. Selected transactions included, (listed
according to seller/buyer) Pinnacle Resources Ltd./Renaissance Energy Ltd.,
Tarragon Oil and Gas Limited/ USX-Marathon Group of USX Corporation, Norcen
Energy Resources Limited/Union Pacific Resources Group Inc., Chauvco Resources
Ltd./Pioneer Natural Resources Company, ELAN Energy Inc./Ranger Oil Limited,
Stampeder Exploration Ltd./Gulf Canada Resources Limited, CS Resources
Limited/PanCanadian Petroleum Limited, Wascana Energy Inc./Canadian Occidental
Petroleum Ltd., Morrison/Northstar, Sceptre Resources Limited/Canadian Natural
Resources Limited, Conwest Exploration Company Limited/ Alberta Energy Company
Ltd. and Home Oil Company Limited/Anderson Exploration Ltd. (the "Northstar
Comparable Acquisitions"). Merrill Lynch reviewed the prices paid in the
Northstar Comparable Acquisitions in terms of: (i) equity market value as a
multiple of latest twelve months ("LTM") discretionary cash flow; (ii)
enterprise value as a multiple of LTM earnings before depletion, depreciation,
amortization, interest, taxes and exploration expense ("EBITDE"); (iii)
consideration paid per Mcfe of proved reserves utilizing a 6:1 conversion ratio
of natural gas to oil; and (iv) consideration paid per Mcfe of proved reserves
utilizing a 10:1 conversion ratio of natural gas to oil. Such analysis indicated
that: (i) the relevant range for Northstar of equity market value as a multiple
of LTM discretionary cash flow was from 5.5x to 8.0x; (ii) the relevant range
for Northstar of enterprise value as a multiple of LTM EBITDE was from 6.5x to
9.0x; (iii) the relevant range of consideration paid per Mcfe of proved reserves
utilizing a 6:1 conversion ratio of natural gas to oil was from $0.75 to $1.15;
and (iv) the relevant range of consideration paid per Mcfe of proved reserves
utilizing a 10:1 conversion ratio of natural gas to oil was from $0.60 to $1.00.
Merrill Lynch applied these relevant ranges
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to the corresponding Northstar financial measures and arrived at a relevant
enterprise value range of $750.0 million to $1,100.0 million. After adjusting
for working capital, proceeds from the exercise of options and total debt and
dividing by the outstanding shares, Merrill Lynch arrived at an equity value
reference range for Northstar of $487.0 million to $837.0 million, or $6.88 to
$11.83 per Northstar Common Share.
Devon Comparable Acquisition Analysis. Merrill Lynch analyzed the financial
terms, to the extent publicly available, of 13 selected corporate acquisition
transactions in the exploration and production industry which were announced
between March 1997 and May 1998. Selected transactions include, (listed
according to seller/buyer) Domain Energy Corp./Lomak Petroleum Inc., Union Texas
Petroleum Energy Corp./ Atlantic Richfield Co., United Meridian Corp./Ocean
Energy Inc., Zilkha Energy Corp./Sonat Inc., Hugoton Energy Corp./Chesapeake
Energy Corp., Coda Energy Inc./Belco Oil & Gas Corp., Monterey Resources,
Inc./Texaco Inc., Louisiana Land & Exploration Co./Burlington Resources Inc.,
Cairn Energy USA Inc./ Meridian Resource Corp., American Exploration Co./Louis
Dreyfus Natural Gas Corp., Ashland Exploration Inc./Statoil A/S, Parker &
Parsley Petroleum Company/Mesa Inc. and Belden & Blake Corp./Texas Pacific
Resources Inc. (the "Devon Comparable Acquisitions"). Merrill Lynch reviewed the
prices paid in the Devon Comparable Acquisitions in terms of: (i) equity market
value as a multiple of LTM discretionary cash flow; (ii) enterprise value as a
multiple of LTM EBITDE; (iii) consideration paid per Mcfe of proved reserves
utilizing a 6:1 conversion ratio of natural gas to oil; and (iv) consideration
paid as a multiple of pre-tax SEC value of proved reserves. Such analysis
indicated that: (i) the relevant range for Devon of equity market value as a
multiple of LTM discretionary cash flow was from 6.0x to 8.0x; (ii) the relevant
range for Devon of enterprise market value as a multiple of LTM EBITDE was from
6.5x to 8.0x; (iii) the relevant range of consideration paid per Mcfe of proved
reserves utilizing a 6:1 conversion ratio of natural gas to oil was from $1.00
to $1.20; and (iv) the relevant range of consideration paid as a multiple of
pre-tax SEC value of proved reserves was from 1.20x to 1.50x. Merrill Lynch
applied these relevant ranges to the corresponding Devon financial measures and
arrived at a relevant enterprise value range of $1,100.0 million to $1,400.0
million. After adjusting for working capital, proceeds from the exercise of
options, the present value (discounted at 10%) of a tax credit repurchase and
total debt and dividing by the outstanding shares, Merrill Lynch arrived at an
equity value reference range for Devon of $1,140.4 million to $1,440.4 million,
or $30.48 to $38.50 per share of Devon Common Stock.
Utilizing the comparable acquisition analyses, Merrill Lynch calculated an
implied exchange ratio of 0.238 to 0.307.
Northstar Comparable Company Trading Analysis. Merrill Lynch reviewed and
compared certain financial information, ratios and public market multiples
relating to Northstar to corresponding financial information, ratios and public
market multiples for nine publicly traded Canadian exploration and production
companies: Canadian 88 Energy Corp., Crestar Energy Inc., Newport Petroleum
Corporation, Northrock Resources Ltd., Numac Energy Inc., Penn West Petroleum
Ltd., Ranger Oil Limited, Rigel Energy Corporation and Tri Link Resources Ltd.
(collectively, the "Northstar Selected Companies"). The Northstar Selected
Companies were chosen because they are publicly traded companies with financial
and operating characteristics which Merrill Lynch deemed to be similar to those
of Northstar. Merrill Lynch calculated various financial ratios for the
Northstar Selected Companies and compared them to those of Northstar. The ratios
for the Northstar Selected Companies were based on publicly available
information, including estimates provided by Merrill Lynch research and the
Institutional Brokers Estimate System ("IBES"). Merrill Lynch calculated the
following financial ratios: (i) equity market value multiples of: (a) 1998
estimated discretionary cash flow; and (b) 1999 estimated discretionary cash
flow; and (ii) adjusted market capitalization multiples of: (a) 1998 estimated
EBITDE; (b) 1999 estimated EBITDE; (c) proved reserves utilizing a 6:1
conversion ratio of natural gas to oil; and (d) proved reserves utilizing a 10:1
conversion ratio of natural gas to oil. For the Northstar Selected Companies,
the highest, lowest and mean equity market value multiples of 1998 estimated
discretionary cash flow were 11.3x, 4.1x and 6.4x and of 1999 estimated
discretionary cash flow were 7.0x, 3.1x and 4.6x. The highest, lowest and mean
adjusted market capitalization multiples of 1998 estimated EBITDE were 12.1x,
6.0x and 8.0x and of 1998 estimated EBITDE were 7.6x, 4.7x and 5.8x. The high,
low and mean adjusted market capitalization per Mcf of proved reserves utilizing
a 6:1 conversion ratio of natural gas to oil were $0.94, $0.52 and $0.71, and
the high, low and mean adjusted market capitalization per Mcf of proved
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reserves utilizing a 10:1 conversion ratio of natural gas to oil were $0.74,
$0.42 and $0.56. Such analysis indicated that, with respect to Northstar,
relevant equity market value multiples for 1998 estimated discretionary cash
flow range from 4.5x to 6.0x, and from 3.5x to 5.0x for 1999 estimated
discretionary cash flow. Further such analyses indicate that, with respect to
Northstar, relevant adjusted market capitalization multiples for 1998 estimated
EBITDE range from 6.0x to 8.0x, 1999 estimated EBITDE range from 5.0x to 7.0x,
per Mcf of proved reserves utilizing a 6:1 conversion ratio of natural gas to
oil range from $0.60 to $0.85 and per Mcf of proved reserves utilizing a 10:1
conversion ratio of natural gas to oil range from $0.50 to $0.70. From the
enterprise value ranges implied by these multiple ranges, Merrill Lynch
determined a composite enterprise value range for Northstar under this method of
$650.0 million to $875.0 million representing an equity market value range of
$387.0 million to $612.0 million, or $5.47 to $8.65 per Northstar Common Share.
None of the Northstar Selected Companies is identical to Northstar.
Accordingly, an analysis of the results of the foregoing is not purely
mathematical. Rather, it involves complex considerations and judgments
concerning differences in financial and operating characteristics of the
Northstar Selected Companies and other factors that could affect the public
trading value of the comparable companies or company to which they are being
compared.
Devon Comparable Company Trading Analysis. Merrill Lynch reviewed and
compared certain financial information, ratios and public market multiples
relating to Devon to corresponding financial information, ratios and public
market multiples for nine publicly traded exploration and production companies:
Apache Corp., Barrett Resources Corp., Burlington Resources Inc., Cross Timbers
Oil Co., Noble Affiliates Inc., Pioneer Natural Resources Co., Snyder Oil Corp.,
Tom Brown, Inc. and Vintage Petroleum Inc. (collectively, the "Devon Selected
Companies"). The Devon Selected Companies were chosen because they are publicly
traded companies with financial and operating characteristics which Merrill
Lynch deemed to be similar to those of Devon. Merrill Lynch calculated various
financial ratios for the Devon Selected Companies and compared them to those of
Devon. The ratios for the Devon Selected Companies were based on publicly
available information, including estimates provided by Merrill Lynch research
and IBES. Merrill Lynch calculated the following financial ratios: (i) equity
market value multiples of: (a) 1998 estimated discretionary cash flow; and (b)
1999 estimated discretionary cash flow; and (ii) adjusted market capitalization
multiples of: (a) 1998 estimated EBITDE; (b) 1999 estimated EBITDE; (c) proved
reserves utilizing a 6:1 conversion ratio of natural gas to oil; and (d) pre-tax
SEC value of proved reserves. For the Devon Selected Companies, the highest,
lowest and mean equity market value multiples of 1998 estimated discretionary
cash flow were 9.4x, 4.7x and 6.7x and of 1999 estimated discretionary cash flow
were 7.8x, 3.9x and 5.3x. The highest, lowest and mean adjusted market
capitalization multiples of 1998 estimated EBITDE were 9.6x, 5.3x and 7.2x and
of 1998 estimated EBITDE were 7.7x, 4.4x and 5.8x. The high, low and mean
adjusted market capitalization per Mcf of proved reserves utilizing a 6:1
conversion ratio of natural gas to oil were $1.50, $0.80 and $1.16, and the
high, low and mean adjusted market capitalization multiples of pre-tax SEC value
were 1.85x, 1.10x and 1.47x. Such analysis indicated that, with respect to
Devon, relevant equity market value multiples for 1998 estimated discretionary
cash flow range from 6.0x to 7.5x and from 4.5x to 6.5x for 1999 estimated
discretionary cash flow. Further such analyses indicate that, with respect to
Devon, relevant adjusted market capitalization multiples for 1998 estimated
EBITDE range from 6.5x to 8.0x, 1999 estimated EBITDE range from 5.5x to 7.0x
and per Mcf of proved reserves utilizing a 6:1 conversion ratio of natural gas
to oil range from $0.95 to $1.20. In addition, such analysis indicated that,
with respect to Devon, relevant adjusted market capitalization multiples for
pre-tax SEC value range from 1.20x to 1.50x. From the enterprise value ranges
implied by these multiple ranges, Merrill Lynch determined a composite
enterprise value range for Devon under this method of $1,050.0 million to
$1,350.0 million representing an equity market value range of $1,090.4 million
to $1,390.4 million, or $29.15 to $37.17 per share of Devon Common Stock.
None of the Devon Selected Companies is identical to Devon. Accordingly, an
analysis of the results of the foregoing is not purely mathematical. Rather, it
involves complex considerations and judgments concerning differences in
financial and operating characteristics of the Devon Selected Companies and
other factors that could affect the public trading value of the comparable
companies or company to which they are being compared.
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Utilizing the comparable company trading analyses, Merrill Lynch calculated
an implied exchange ratio of 0.188 to 0.233.
Contribution Analysis. Merrill Lynch analyzed the respective contributions
of each of Northstar and Devon to the resulting combined company. Such measures
analyzed included estimated proved reserves as provided in the Devon Reserve
Reports and Northstar Reserve Reports, and estimated EBITDE and discretionary
cash flow contributed to the combined company for the years 1997 through 1999.
These contributions were compared to the relative ownership positions of the
existing Northstar and Devon shareholders after the Combination. From these
analyses, Merrill Lynch estimated that Devon contributed 65.7% of estimated
proved reserves; 68.1%, 69.1% and 67.1% of estimated 1997, 1998 and 1999 EBITDE,
respectively; and 60.1%, 64.5% and 62.8% of estimated 1997, 1998 and 1999
discretionary cash flow, respectively; as compared to an estimated 70.0% Devon
ownership in the combined company based on the Exchange Ratio.
Pro Forma Merger Consequences Analysis. Merrill Lynch analyzed certain pro
forma effects that could result from the Combination. In connection with such
analyses, Merrill Lynch used Devon's production projections with respect to
proved reserves and 50% of probable reserves as provided in the Devon Reserve
Reports, applied commodity prices assumed in Case I of the DCF analysis and
adjusted such prices for transportation charges and quality differentials, and
used Devon's projections for all related costs, expenses and taxes to derive the
future financial performance of Devon for the years 1998, 1999, and 2000.
Similarly, Merrill Lynch used Northstar's projections with respect to proved
reserves and 50% of probable reserves as provided in the Northstar Reserve
Reports, applied commodity prices assumed in Case I of the DCF analysis and
adjusted such prices for transportation charges and quality differentials, and
used Northstar's projections for all related costs, expenses and taxes to derive
the future financial performance of Northstar for the years 1998, 1999 and 2000.
Assuming that the Combination would be given pooling-of-interests accounting
treatment, Merrill Lynch then analyzed the pro forma effects of the Combination.
This analysis indicated that the discretionary cash flow per share of the
combined company would be approximately 7.9% higher for Devon in 1998,
approximately 10.6% higher in 1999 and approximately 8.1% higher in 2000, and
that the pro forma earnings per share would be higher by approximately 2.1% in
1998, 9.9% in 1999 and 9.0% in 2000. For the purposes of such analysis, Merrill
Lynch defined discretionary cash flow per share as (a) net income to common
stock plus depletion, depreciation, amortization and exploration expenses, plus
deferred taxes and other non-cash charges, but not including changes in working
capital, divided by (b) the pro forma shares outstanding.
Merrill Lynch is an internationally recognized investment banking firm
engaged in the valuation of businesses and their securities in connection with
mergers and acquisitions and for other purposes. Devon selected Merrill Lynch to
issue a fairness opinion in connection with the Combination because of its
international reputation and its substantial experience and expertise in
transactions similar to the Combination. Merrill Lynch, as part of its
investment banking business, is continuously engaged in the valuation of
businesses and securities in connection with mergers and acquisitions,
negotiated underwritings, competitive biddings, secondary distributions of
listed and unlisted securities, private placements and valuations for corporate
and other purposes. In the ordinary course of its business, Merrill Lynch and
its affiliates may actively trade the debt and equity securities of Devon and
Northstar for their own account and for the accounts of customers and,
accordingly, may at any time hold a long or short position in such securities.
As of the date of the Merrill Lynch Opinion, Merrill Lynch held approximately
2,201,500 shares of Devon Common Stock, representing approximately 6.8% of the
outstanding shares of Devon Common Stock, through various affiliates. In
addition, Merrill Lynch owns 1,000,000 shares of Devon's TCP Securities which
are convertible into 1,639,300 shares of Devon Common Stock.
Devon Financial Advisor Fee. In connection with Merrill Lynch's services as
financial advisor to Devon, Devon has agreed to pay Merrill Lynch, as
compensation for its services, a $1,000,000 fee payable upon the earlier of: (i)
the date the Merrill Lynch Opinion is first included in a filing with the SEC;
or (ii) the closing of the Combination. No separate fee was payable to Merrill
Lynch in connection with rendering its opinion. Devon has also agreed to
reimburse Merrill Lynch for its expenses incurred in connection with the
Combination (including reasonable fees and expenses of its legal counsel) and to
indemnify Merrill Lynch
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and certain related persons against certain liabilities and expenses in
connection with the Combination, including certain liabilities under the federal
securities laws.
Opinion of Morgan Stanley
Morgan Stanley was retained by Northstar to, among other things, act as
financial advisor in connection with the Combination. Morgan Stanley is an
internationally recognized investment banking firm and was selected by Northstar
based on Morgan Stanley's qualifications and expertise in the oil and natural
gas exploration and production industry.
Pursuant to the Arrangement, Northstar shareholders will receive
Exchangeable Shares, in accordance with the Exchange Ratio, and Northstar
Optionholders will have their Northstar Options converted into options to
purchase shares of Devon Common Stock, in accordance with the Exchange Ratio
applicable to Northstar Common Shares (the consideration received by Northstar
Common Shareholders and Northstar Optionholders, in the aggregate, is referred
to herein as the "Consideration").
During the week of June 22, 1998 Morgan Stanley reviewed with the Northstar
Board on several occasions a number of analyses which would support its opinion
related to the Combination. Morgan Stanley subsequently delivered to the
Northstar Board a written opinion dated as of June 29, 1998 that as of such date
and based upon and subject to the various considerations set forth in its
opinion, the Consideration to be received pursuant to the Combination Agreement
in the aggregate was fair from a financial point of view to holders of Northstar
Common Shares and Northstar Options.
THE FULL TEXT OF MORGAN STANLEY'S WRITTEN OPINION, WHICH SETS FORTH, AMONG
OTHER THINGS, ASSUMPTIONS MADE, PROCEDURES FOLLOWED, MATTERS CONSIDERED AND THE
LIMITS OF THE REVIEW UNDERTAKEN, IS ATTACHED AS ANNEX I TO THIS JOINT PROXY
STATEMENT AND IS INCORPORATED HEREIN BY REFERENCE. HOLDERS OF NORTHSTAR COMMON
SHARES AND NORTHSTAR OPTIONS ARE URGED TO, AND SHOULD, READ THE OPINION
CAREFULLY AND IN ITS ENTIRETY. MORGAN STANLEY'S OPINION IS ADDRESSED TO THE
NORTHSTAR BOARD AND ADDRESSES THE FAIRNESS OF THE CONSIDERATION TO BE RECEIVED
IN THE AGGREGATE PURSUANT TO THE COMBINATION AGREEMENT FROM A FINANCIAL POINT OF
VIEW TO THE HOLDERS OF NORTHSTAR COMMON SHARES AND NORTHSTAR OPTIONS, AND IT
DOES NOT ADDRESS ANY OTHER ASPECT OF THE COMBINATION NOR DOES IT CONSTITUTE A
RECOMMENDATION TO THE SHAREHOLDERS OF NORTHSTAR OR DEVON AS TO HOW THEY SHOULD
VOTE AT THE SHAREHOLDERS' MEETINGS HELD IN CONNECTION WITH THE COMBINATION. THE
SUMMARY OF THE OPINION OF MORGAN STANLEY SET FORTH IN THIS JOINT PROXY STATEMENT
IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO THE FULL TEXT OF SUCH OPINION.
In rendering its opinion, Morgan Stanley, among other things: (i) reviewed
certain publicly available financial statements and other information of
Northstar and Devon, respectively; (ii) reviewed certain internal financial
statements and other financial and operating data concerning Northstar and Devon
prepared by the management of Northstar and Devon, respectively; (iii) discussed
the past and current operations and financial condition and the prospects of
Northstar with senior executives of Northstar; (iv) discussed the past and
current operations and financial condition and the prospects of Devon with
senior executives of Devon; (v) analyzed certain financial projections prepared
by the management of Northstar and Devon, respectively; (vi) reviewed the pro
forma impact of the Combination on Devon's earnings per share, cash flow, oil
and gas reserves and production, consolidated capitalization and financial
ratios; (vii) reviewed the reported prices and trading activity for the
Northstar Common Shares and the Devon Common Stock into which the Exchangeable
Shares are exchangeable on a 1:1 basis; (viii) compared the financial
performance of Northstar and the prices and trading activity of the Northstar
Common Shares with that of certain other comparable publicly-traded companies
and their securities; (ix) compared the financial performance of Devon and the
prices and trading activity of the Devon Common Stock with that of certain other
comparable publicly-traded companies and their securities; (x) reviewed the
financial terms, to the extent publicly available, of certain comparable
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acquisition transactions; (xi) reviewed the draft of the Combination Agreement
and certain related documents, including the terms of the Exchangeable Shares
and the terms of the Northstar Options; (xii) reviewed the Northstar Reserve
Reports and certain other internal evaluations of reserves prepared by Northstar
engineers; (xiii) reviewed the Devon Reserve Reports; and (xiv) performed such
other analyses as Morgan Stanley deemed appropriate.
In rendering its opinion, Morgan Stanley assumed and relied upon without
independent verification the accuracy and completeness of the information
reviewed by it for the purposes of this opinion. With respect to the financial
projections, Morgan Stanley assumed that they had been reasonably prepared on
bases reflecting the best currently available estimates and judgments of the
future financial performance of Northstar and Devon. In addition, Morgan Stanley
assumed that the Combination will be consummated in accordance with the terms
set forth in the Combination Agreement, including, among other things, that the
Combination will be treated as a tax-deferred exchange pursuant to the Canadian
Tax Act. Morgan Stanley did not make any independent valuation or appraisal of
the assets or liabilities of Northstar or Devon, however, Morgan Stanley did
review the reports referred to in items (xii) and (xiii) in the paragraph above
and has relied without independent verification upon such items for the purposes
of this opinion. Morgan Stanley's opinion is necessarily based on economic,
market and other conditions as in effect on, and the information made available
to it as of, the date of its opinion.
The following is a brief summary of certain analyses performed by Morgan
Stanley and reviewed with the Northstar Board during the week of June 22, 1998.
On June 29, 1998, Morgan Stanley delivered its written opinion, as of such date
and based upon and subject to the various considerations set forth in its
written opinion as to the fairness from a financial point of view of the
Consideration to be received pursuant to the Combination Agreement in the
aggregate to holders of Northstar Common Shares and Northstar Options.
Historical Common Share Performance. Morgan Stanley's analysis of the
performance of Northstar Common Shares consisted of an historical analysis of
closing prices and trading volumes over the period from June 19, 1995 to June
19, 1998. During that period, based on closing prices on the TSE, Northstar
Common Shares achieved a high closing price of Cdn. $17.25 on December 4, 1996
and a low closing price of Cdn. $8.05 on January 9, 1998. Additionally, Morgan
Stanley noted that Northstar Common Shares closed at a price of Cdn. $9.60 on
June 22, 1998.
Morgan Stanley's analysis of the performance of the shares of Devon Common
Stock consisted of an historical analysis of closing prices and trading volumes
over the period from June 19, 1995 to June 19, 1998. During that period, based
on closing prices on the AMEX, Devon Common Stock achieved a high closing price
of $48.4375 on October 13, 1997 and a low closing price of $18.50 on July 26,
1995. Additionally, Morgan Stanley noted that Devon Common Stock closed at a
price of $34.25 on June 22, 1998.
Comparative Stock Price Performance. Morgan Stanley performed an historical
analysis of closing prices from June 19, 1995 to June 19, 1998 of: Northstar
Common Shares; Devon Common Stock; the TSE 300 Index; the S&P 500 Index; an
index of Canadian conventional oil exploration and production companies
("Canadian Conventional Oil Index") consisting of Anderson Exploration Ltd.,
Northrock Resources Ltd., Penn West Petroleum Ltd., Poco Petroleums Ltd., and
Rigel Energy Corporation; an index of Canadian heavy and medium oil exploration
and production companies ("Canadian Heavy and Medium Oil Index") consisting of
Amber Energy Inc., Crestar Energy Inc., Numac Energy Inc., and Pinnacle
Resources Ltd.; and an index of U.S. exploration and production companies ("U.S.
E&P Index") consisting of Apache Corp., Cross Timbers Oil Co., Enron Oil & Gas,
Louis Dreyfus Natural Gas, Noble Affiliates Inc., Nuevo Energy Co., Oryx Energy
Co., Pioneer Natural Resources Co., Santa Fe Energy Resources, Seagull Energy
Corp., Union Pacific Resources, and Vintage Petroleum Inc. This analysis
consisted of a comparison of the performance of such companies and indexes to
the performance of Northstar Common Shares during such period. Morgan Stanley
observed that, over the period examined, Northstar underperformed the TSE 300
Index, the Canadian Conventional Oil Index, the Canadian Heavy and Medium Oil
Index, Devon Common Stock, the S&P 500 Index and the U.S. E&P Index.
Comparable Public Company Analysis. As part of its analysis, Morgan Stanley
compared certain publicly available financial information of two groups of
comparable publicly traded Canadian exploration and
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production companies, including Anderson Exploration Ltd., Northrock Resources
Ltd., Penn West Petroleum Ltd., Poco Petroleums Ltd., and Rigel Energy
Corporation, (collectively the "Conventional Oil Comparable Companies") and
Amber Energy Inc., Crestar Energy Inc., and Numac Energy Inc., (collectively,
the "Heavy and Medium Oil Comparable Companies") and applied these statistics to
the financial performance of Northstar. Such financial information included the
price to cash flow multiple, the market capitalization to earnings before
interest, tax, depletion, depreciation and amortization ("EBITDA") multiple, the
market capitalization less the value of non-reserve assets ("Adjusted Price")
per gross proved Boe (utilizing a 10:1 conversion ratio of natural gas to oil)
reserves multiple, and the Adjusted Price per gross daily Boe produced multiple,
based on Institutional Brokers Estimate System ("IBES") median cash flow per
share forecasts and Morgan Stanley estimates of non-reserve asset valuations.
Such analyses indicated that as of June 19, 1998 and based on a compilation
of IBES estimates, Northstar traded at 4.3 times forecasted cash flow for the
calendar year 1998, 3.6 times forecasted cash flow for the calendar year 1999,
6.4 times forecasted EBITDA for the calendar year 1998, 5.4 times forecasted
EBITDA for the calendar year 1999, Cdn. $7.41 per gross proved Boe of reserves,
and Cdn. $20,083 per gross daily Boe produced. These multiples were compared to
a range of multiples based on 1998 forecasted cash flow (5.5 to 5.8 times with a
mean of 5.7 times for the Conventional Oil Comparable Companies; 4.0 to 9.1
times with a mean of 5.8 times for the Heavy and Medium Oil Comparable
Companies), 1999 forecasted cash flow (4.0 to 4.9 times with a mean of 4.4 times
for the Conventional Oil Comparable Companies; 3.2 to 4.5 times with a mean of
3.7 times for the Heavy and Medium Oil Comparable Companies), 1998 forecasted
EBITDA (6.3 to 7.8 times with a mean of 6.9 times for the Conventional Oil
Comparable Companies; 5.6 to 10.0 times with a mean of 7.1 times for the Heavy
and Medium Oil Comparable Companies), 1999 forecasted EBITDA (4.6 to 6.0 times
with a mean of 5.5 times for the Conventional Oil Comparable Companies; 4.5 to
4.9 times with a mean of 4.7 times for the Heavy and Medium Oil Comparable
Companies), Adjusted Price per gross proved Boe of reserves (Cdn. $7.50 to Cdn.
$10.04 with a mean of Cdn. $8.50 for the Conventional Oil Comparable Companies;
Cdn. $4.79 to Cdn. $10.66 with a mean of Cdn. $7.18 for the Heavy and Medium Oil
Comparable Companies) and Adjusted Price per gross daily Boe produced (Cdn.
$22,574 to Cdn. $32,568 with a mean of Cdn. $26,055 for the Conventional Oil
Comparable Companies; Cdn. $13,025 to Cdn. $34,133 with a mean of Cdn. $20,740
for the Heavy and Medium Oil Comparable Companies).
As part of its analysis, Morgan Stanley also compared certain available
financial information of a group of comparable publicly-traded U.S. exploration
and production companies and applied these statistics to the financial
performance of Devon. Comparable companies included Apache Corp., Cross Timbers
Oil Co., Enron Oil & Gas, Louis Dreyfus Natural Gas, Noble Affiliates Inc.,
Nuevo Energy Co., Oryx Energy Co., Pioneer Natural Resources Co., Santa Fe
Energy Resources, Seagull Energy Corp., Union Pacific Resources, and Vintage
Petroleum Inc. (collectively, the "U.S. E&P Comparable Companies"). Such
financial information included the price to cash flow multiple and market
capitalization to EBITDA multiple based on a compilation of industry analyst
cash flow per share forecasts. Such analyses indicated that as of June 19, 1998
and based on a compilation of industry analyst cash flow per share estimates,
Devon traded at 8.1 times forecasted cash flow for the calendar year 1998, 6.8
times forecasted cash flow for the calendar year 1999, 7.8 times forecasted
EBITDA for the calendar year 1998 and 6.7 times forecasted EBITDA for the
calendar year 1999. These multiples were compared to a range of multiples based
on 1998 forecasted cash flow (3.8 to 8.1 times with a mean of 5.2 times), 1999
forecasted cash flow (3.3 to 7.3 times with a mean of 4.5 times), 1998
forecasted EBITDA (5.3 to 8.9 times with a mean of 6.7 times) and 1999
forecasted EBITDA (4.8 to 8.5 times with a mean of 5.8 times) for the U.S. E&P
Comparable Companies.
No company utilized in the comparable public company analysis or the
comparable stock price performance is identical to Northstar or Devon.
Accordingly, an analysis of the results of the foregoing necessarily involves
complex considerations and judgments concerning differences in financial and
operating characteristics of Northstar or Devon and other factors that could
affect the public trading value of the companies to which they are being
compared. In evaluating the comparable companies, Morgan Stanley made judgments
and assumptions with regard to industry performance, general business, economic,
market and financial conditions and other matters, many of which are beyond the
control of Northstar or Devon, such as the impact of consolidation on Northstar
or Devon and the industry generally, industry growth and/or
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cyclicality and the absence of any adverse material change in the financial
conditions and prospects of Northstar or Devon or the industry or in the
financial markets in general. Mathematical analysis (such as determining the
mean or median) is not, in itself, a meaningful method of using comparable
company data.
Discounted Cash Flow Analysis. Morgan Stanley performed a discounted cash
flow ("DCF") analysis of Northstar based on certain financial projections
prepared by Northstar management for Northstar for the years 1998 through 2002.
Northstar management's projections include a West Texas Intermediate ("WTI")
crude oil price forecast of $16.70, $19.00, $20.00, $21.50 and $22.00 for 1998
through 2002, respectively, a realized Canadian natural gas price forecast of
Cdn. $1.88, Cdn. $2.20, Cdn. $2.32, Cdn. $2.38 and Cdn. $2.38 for 1998 through
2002, respectively, and a realized natural gas liquids price forecast of Cdn.
$12.52, Cdn. $16.54, Cdn. $17.76, Cdn. $19.76 and Cdn. $20.38 for 1998 through
2002, respectively. Northstar management's realized crude oil price is based on
their estimates for WTI, adjusted to incorporate forecasted exchange rates,
currently existing foreign exchange hedges, currently existing oil price hedges,
contracted future oil sales and an oil quality adjustment.
Morgan Stanley discounted the unlevered free cash flows of Northstar over
the forecast period at a range of discount rates, representing an estimated
weighted average cost of capital for Northstar, and terminal values based on a
range of EBITDA multiples based on current public market valuation implied
EBITDA multiples of comparable companies. Unlevered free cash flow was
calculated as net income available to common stockholders plus the aggregate of
depreciation and amortization, deferred taxes, and other non-cash expenses and
after-tax net interest expense less the sum of capital expenditures and
investment in non-cash working capital. The present values determined from these
analyses were then adjusted for long-term liabilities, including debt net of
cash, to arrive at an equity value. Based on this analysis, Morgan Stanley
calculated per share values for Northstar ranging from Cdn. $10.90 to Cdn.
$14.95.
Morgan Stanley also performed analyses to determine the sensitivity of the
DCF valuation to changes in the projections of future performance including
commodity price projections. A reduction of projected commodity prices by 10%
relative to Northstar management's estimates resulted in a range of per share
values for Northstar of Cdn. $6.78 to Cdn. $10.25. Separately, a reduction in
the projected four-year compound annual growth in production from a rate of
16.0% (Northstar management's target) to 10.0% resulted in a range of per share
values for Northstar of Cdn. $7.72 to Cdn. $10.93.
Net Asset Valuation Analysis. Morgan Stanley also performed a net asset
valuation ("NAV") analysis of Northstar, based on the aggregate value of
Northstar's assets and liabilities, each valued using an appropriate methodology
specific to the asset or liability.
Northstar's proved and probable reserves were valued by discounting the
projected pre-tax cash flows resulting from the expected future production of
Northstar's current reserves, without giving any consideration to potential
additional reserves that could arise through an ongoing program of exploration
and development. Morgan Stanley's NAV analysis utilized the reserve reports of
Northstar's independent reserve engineers, and assumed that 100% of stated
proved reserves and 50% of stated probable reserves would be produced. The
future pre-tax cash flows were estimated based on Morgan Stanley's commodity
price forecasts, and were discounted at 10%. Northstar's non-reserve assets,
including but not limited to net undeveloped acreage, 2-D and 3-D seismic data,
excess processing capacity, pipelines and other infrastructure, were valued
based on public data and Northstar management estimates.
The aggregate value of Northstar's assets was then adjusted for long-term
liabilities, including debt net of cash, to arrive at an NAV. Based on this
analysis, Morgan Stanley calculated per share values for Northstar ranging from
Cdn. $9.32 to Cdn. $11.37. A similar analysis for Devon yielded per share values
of $32.87 to $36.33.
Analysis of Selected Precedent Transactions. Using publicly available
information, Morgan Stanley reviewed the terms of 18 recently announced pending
or completed Canadian exploration and production company acquisition
transactions (collectively, the "E&P Company Transactions"). For the E&P Company
Transactions, the Adjusted Price per gross proved Boe of reserves ranged from
Cdn. $4.11 to Cdn. $11.50 with a mean of Cdn. $8.09, the Adjusted Price per
gross daily Boe produced ranged from Cdn. $15,112 to
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Cdn. $34,641 with a mean of Cdn. $24,350, the market capitalization to latest
twelve months EBITDA multiple ranged from 4.5 times to 10.8 times with a mean of
7.7 times, the equity value to 1999 forecasted cash flow multiple ranged from
4.1 times to 7.0 times with a mean of 5.3 times, and the premium to unaffected
market price ranged from -15% to 64%, with a mean of 25%. Morgan Stanley noted
that the value implied by the Combination of approximately Cdn. $11.35 per
Northstar Common Share, based on the Exchange Ratio, Devon's closing price per
share on June 19, 1998 and the prevailing $Cdn./$U.S. exchange rate, was within
the range of implied private market values for Northstar derived from the above
precedent transaction parameters.
No transaction utilized as a comparison in the analysis of selected
precedent transactions is identical to the Combination. Accordingly, an analysis
of the results of the foregoing and Devon involves complex considerations and
judgments concerning differences in financial and operating characteristics and
other factors that would affect the acquisition value of the companies to which
it is being compared. In evaluating the precedent transactions, Morgan Stanley
made judgments and assumptions with regard to industry performance, global
business, economic, market and financial conditions and other matters, many of
which are beyond the control of Northstar and Devon, such as the impact of
competition on Northstar and Devon and the industry generally, industry growth
and/or cyclicality and the absence of any adverse material change in the
financial conditions and prospects of Northstar or the industry or the financial
markets in general. Mathematical analysis (such as determining the mean or
median) is not, in itself, a meaningful method of using precedent transactions
data.
Historical Exchange Ratio Analysis. Morgan Stanley also reviewed the ratio
of the closing prices of Northstar Common Shares to Devon Common Stock over the
intervals of three months, six months, one year, two years, and three years
prior to June 19, 1998. Such implied ratios averaged 0.172 over the prior 3
months, 0.176 over the prior 6 months, 0.189 over the prior year, 0.264 over the
prior two years, and 0.315 over the prior three years. Morgan Stanley noted that
the ratio based on closing prices on June 22, 1998 was 0.190.
Pro Forma Analysis of the Combination. Morgan Stanley analyzed the pro
forma impact of the Combination on cash flow per share for Devon for the fiscal
years 1998 and 1999. The pro forma results were calculated as if the Combination
had closed at the beginning of 1998, and were based on projected cash flow
derived from respective management projections. Morgan Stanley noted that the
Combination would be additive to Devon's cash flow per share by approximately 5%
in 1998 and 8% in 1999.
The preparation of a fairness opinion is a complex process and is not
necessarily susceptible to a partial analysis or summary description. Morgan
Stanley believes that its analyses must be considered as a whole and that
selecting portions of its analyses and the factors considered by it, without
considering all analyses and factors, would create an incomplete view of the
process underlying its opinion. In addition, Morgan Stanley may have deemed
various assumptions more or less probable than other assumptions, so that the
range of valuations resulting for any particular analysis described above should
therefore not be taken to be Morgan Stanley's view of the actual value of
Northstar or Devon.
In connection with the review of the Combination by the Northstar Board,
Morgan Stanley performed a variety of financial and comparative analyses for
purposes of its opinion given in connection therewith. The summary set forth
above does not purport to be a complete description of the analyses performed by
Morgan Stanley in connection with the Combination.
In performing its analyses, Morgan Stanley made numerous assumptions with
respect to industry performance, general business and economic conditions and
other matters, many of which are beyond the control of Northstar or Devon. The
analyses performed by Morgan Stanley are not necessarily indicative of actual
values, which may be significantly more or less favorable than suggested by such
analyses. Such analyses were prepared solely as part of Morgan Stanley's
preparation of its fairness opinion and were provided to the Northstar Board in
connection with the delivery of Morgan Stanley's oral and written opinions.
These analyses do not purport to be appraisals or to reflect the prices at which
Northstar or Devon might actually be sold.
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As described above, Morgan Stanley's opinion and presentation to the
Northstar Board were one of many factors taken into consideration by the
Northstar Board in making its determination to approve the Combination Agreement
and the Arrangement. Consequently, the Morgan Stanley analyses described above
should not be viewed as determinative of the opinion of the Northstar Board or
the management of Northstar with respect to the value of Northstar or Devon or
whether the Northstar Board would have been willing to agree to a different
Consideration.
Morgan Stanley is a full services securities firm, engaged in securities
trading and brokerage activities, as well as providing investment banking,
financial and financial advisory services. As part of its investment banking
business, Morgan Stanley is regularly engaged in the valuation of businesses and
securities in connection with mergers and acquisitions, negotiated
underwritings, competitive biddings, secondary distributions of listed and
unlisted securities, private placements and valuations for estate, corporate and
other purposes. In the ordinary course of its trading, brokerage and financing
activities, Morgan Stanley and its affiliates may actively trade or effect
transactions in the debt and equity securities or senior loans of Northstar and
Devon for their own account or for the account of customers and may, from time
to time, hold a long or short position in, and buy and sell, securities of
Northstar or Devon. In the past, Morgan Stanley and its affiliates have provided
financial advisory and financing services to Devon and its affiliates and have
received customary fees in connection with these services.
Pursuant to an engagement letter between Northstar and Morgan Stanley,
Northstar has agreed to pay Morgan Stanley (i) an advisory fee estimated to be
between Cdn. $50,000 and Cdn. $100,000 which is payable in the event that the
Combination is not completed, and (ii) if the Combination is successfully
completed, a transaction fee of approximately $4.0 million, against which any
advisory fees paid will be credited. Northstar has also agreed to reimburse
Morgan Stanley for its out-of-pocket expenses related to its engagement.
Northstar has agreed to indemnify Morgan Stanley and its affiliates, their
respective directors, officers, agents and employees, and each person, if any,
controlling Morgan Stanley or any of its affiliates against certain liabilities
and expenses, including liabilities under the federal securities laws arising
out of or in connection with Morgan Stanley's engagement.
Opinion of RBC DS
The following is a summary of the RBC DS Opinion. Northstar retained RBC DS
to act as a financial advisor in connection with evaluating Northstar's
strategic options and strategic transaction alternatives (including the
Arrangement) and to provide an opinion with respect to the fairness of a
transaction from a financial point of view to the Northstar Shareholders and
Northstar Optionholders. RBC DS verbally advised the Northstar Board on June 26,
1998, which opinion was confirmed in writing as at June 29, 1998, that the terms
of the Arrangement between Northstar and Devon contemplated by the Arrangement
Agreement were fair to the Northstar Shareholders and Northstar Optionholders
from a financial point of view.
THE FULL TEXT OF THE WRITTEN RBC DS OPINION, WHICH SETS FORTH THE
ASSUMPTIONS MADE, MATTERS CONSIDERED AND LIMITATIONS ON THE REVIEW UNDERTAKEN IN
CONNECTION WITH THE RBC DS OPINION, IS ATTACHED HERETO AS ANNEX J TO THIS JOINT
PROXY STATEMENT. NORTHSTAR SHAREHOLDERS AND NORTHSTAR OPTIONHOLDERS ARE URGED
TO, AND SHOULD, READ THE RBC DS OPINION IN ITS ENTIRETY.
In connection with rendering its Opinion, RBC DS reviewed and relied upon
or carried out, among other things: (i) the Combination Agreement dated June 29,
1998 between Northstar and Devon; (ii) audited financial statements of Northstar
and Devon for the five years ended December 31, 1997; (iii) the unaudited
interim reports of Northstar and Devon for the three months ended March 31,
1998; (iv) annual reports of Northstar and Devon for the two years ended
December 31, 1996 and 1997; (v) the Notices of Annual Meetings of Shareholders
and Management Information Circulars of Northstar and Devon for the two years
ended December 31, 1996 and 1997; (vi) annual information forms of Northstar and
Form 10-K's of Devon for the two years ended December 31, 1996 and 1997; (vii)
internal management budgets of Northstar and Devon for the year ending December
31, 1998; (viii) internal management five year operational and financial
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forecasts of Devon and Northstar; (ix) discussions with senior management of
Northstar and Devon; (x) discussions with senior management of Northstar and
Devon reviewing first quarter exploration results; (xi) discussions with both
Northstar's and Devon's auditors and legal counsel; (xii) public information
relating to the business, operations, financial performance and stock trading
history of Northstar, Devon and other selected public companies considered by
RBC DS to be relevant; (xiii) public information with respect to other
transactions of a comparable nature considered by RBC DS to be relevant; (xiv)
the reports of John P. Hunter and Associates Ltd. ("Hunter") and Paddock
Lindstrom & Associates ("Paddock"), independent engineering consultants,
regarding Northstar's petroleum reserves, with an effective date of December 31,
1997; (xv) the report of LaRoche Petroleum Consultants, Ltd. ("LaRoche"),
independent engineering consultants, regarding Devon's petroleum reserves, with
an effective date of December 31, 1997; (xvi) discussions with Hunter and
Paddock regarding the reserves of Northstar; (xvii) discussions with LaRoche
regarding the reserves of Devon; (xviii) information pertaining to Northstar's
income tax pools and Devon's tax credits as provided by Northstar and Devon,
respectively; (xix) representations contained in a certificate addressed to RBC
DS, dated June 26, 1998, from senior officers of Northstar as to the
completeness and accuracy of the information upon which the RBC DS Opinion is
based; and (xx) such other corporate, industry and financial market information,
investigations and analyses as RBC DS considered necessary or appropriate in the
circumstances.
RBC DS relied upon and assumed the completeness, accuracy and fair
presentation of all of the information obtained by it from public sources and
provided by senior management of Northstar, Devon and their respective
consultants and advisors. The RBC DS Opinion is conditional upon the
completeness, accuracy and fair presentation of such information. RBC DS has not
attempted to verify independently the completeness, accuracy or fair
presentation of such information. In connection with rendering the RBC DS
Opinion, RBC DS did not review any drafts of the Joint Proxy Statement because
one was not yet available at the date of the offer. RBC DS was not, to the best
of its knowledge, denied access by Northstar or Devon to any information
requested by RBC DS. RBC DS made a number of assumptions, including that all of
the conditions required to implement the Arrangement will be met. The RBC DS
Opinion was rendered on the basis of securities markets, economic, financial and
general business conditions prevailing as at the date of the RBC DS Opinion and
the condition and prospects, financial and otherwise, of Northstar, Devon and
their respective subsidiaries and affiliates, as they were reflected in the
information and documents reviewed and as they were represented to RBC DS in
discussions with management of Northstar and Devon, respectively. In its
analyses and in preparing the RBC DS Opinion, RBC DS made numerous assumptions
with respect to industry performance, general business and economic conditions
and other matters, many of which are beyond the control of RBC DS or any other
party involved in the Arrangement.
The following is a brief summary of certain financial analyses used by RBC
DS in connection with providing its opinion to the Northstar Board.
(i) Recent Trading Levels of Devon Common Stock. RBC DS reviewed the
trading levels of the Devon Common Stock given that the Exchangeable Shares
are exchangeable on a one for one basis for Devon Common Stock. RBC DS
considered that the market price of the Devon Common Stock would be an
appropriate indicator of the value of the share consideration being offered
to the shareholders of Northstar under the Arrangement, in view of the
following: (i) Devon is a widely-held company listed on the American Stock
Exchange with a market capitalization of approximately $1.2 billion. The
average daily trading volume of Devon Common Stock on the AMEX was 74,860
shares over the six month period ended June 26, 1998, the last trading day
prior to the announcement of the Arrangement; and (ii) Devon is well
covered by equity market analysts and trades on a comparable basis and in a
manner consistent with other comparable, publicly traded oil and gas
producers in the United States.
(ii) Recent Trading Levels of Northstar Common Shares. RBC DS also
analyzed the recent trading levels of Northstar Common Shares. On June 26,
1998, the last trading day prior to the announcement of the Arrangement,
the Northstar Common Shares and the Devon Common Stock closed trading on
the TSE and the AMEX at Cdn.$9.75 and $36.50 per share, respectively.
Utilizing a U.S./Canadian dollar exchange rate of 1.468 and a collar value
(being the value of the Exchange Rate Adjustment) (the "Collar Value") of
Cdn.$0.11, the value to be received per Northstar Common Share
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under the Arrangement is Cdn.$12.28, representing a premium of 25.9% to the
closing price of the Northstar Common Shares on such date. The simple
arithmetic mean of the closing price of the Devon Common Stock on the AMEX
for the 20 days prior to and including June 26, 1998 was $35.39 per share.
Using an average price per Devon Common Stock of $35.39, a U.S./Canadian
dollar exchange rate of 1.465 and a Collar Value of Cdn.$0.11, the value of
the consideration to be received under the Arrangement is Cdn.$11.89, which
represents a premium of approximately 32.0% to the simple arithmetic mean
of the Northstar Common Shares' closing price on the TSE for the same 20
day period. RBC DS viewed the premiums as being consistent with the range
of premiums for recent takeover transactions in the oil and gas sector in
Canada.
(iii) Net Asset Value Analysis. The net asset value ("NAV") approach
ascribes a separate value for each category of asset and liability
utilizing the methodology appropriate in each case; the sum of total assets
less total liabilities yields the NAV. This approach ascribes value to the
proved and probable reserves existing at the time of valuation on the basis
of discounted future after-tax cash flows, and does not anticipate the
future addition of reserves through an ongoing exploration and development
program. This approach is known as a "depletion" or "blowdown" evaluation
and is a common method of evaluation of petroleum interests (reserves and
related production facilities) in the oil and gas industry. Capital
expenditures required to develop existing reserves are deducted from
reserve values. Provision is made for general and administrative expenses
required to produce the existing reserves as well as for costs associated
with future well abandonment and reclamation of sites related to such wells
and associated plant and facility equipment. In addition, a value is
ascribed for other material assets utilizing the methodology appropriate in
each case.
RBC DS prepared a NAV analysis of Northstar utilizing the Hunter and
Paddock independent engineering consultants reports. The engineering
reports were run at commodity prices which RBC DS deemed to be reflective
of current market views for both gas and oil. Specifically, the WTI oil
price forecast per barrel was $16.50, $18.00 and $18.54 for the calendar
years 1998, 1999 and 2000, respectively, and escalated at 3% thereafter.
The gas price forecast utilized was an Alberta average price per MMBtu and
was Cdn.$1.90, Cdn.$2.25 and Cdn.$2.32 for the calendar years 1998, 1999
and 2000, respectively, and escalated at 3% thereafter. Operating costs
were escalated at 3% per year. RBC DS reviewed a number of comparable oil
and gas companies and their respective weighted average cost of capital
and, based on those comparable companies and Northstar's current capital
structure, RBC DS selected discount rates of 8% and 10% to apply to
after-tax cash flows calculated based on the engineering reports. A risk
factor of 100% was applied to the proved producing reserves and the
probable reserves were risked at 50%. Undeveloped land was segmented based
upon geographical area and separate values ranging from Cdn.$50 to Cdn.$170
per acre were assigned based on recent land sale values. Other assets
including processing capacity, heavy oil leases, tax pools, seismic data
bases and pipelines were valued based on public information and discussions
with Northstar management. The NAV approach, including taking into account
sensitivity analyses described above, generated values from Cdn.$8.17 to
Cdn.$10.28 per Northstar Common Share which are below the price per
Northstar Common Share proposed under the Arrangement. RBC DS also ran both
high and low case commodity price forecasts to determine the impact on the
Northstar NAV. Specifically, the WTI oil price forecast per barrel utilized
for the high case was $18.00, $19.38 and $20.81 for the calendar years
1998, 1999 and 2000, respectively, and escalated at 3% thereafter. The WTI
forecast per barrel utilized for the low case was $14.79, $16.30 and $16.79
for the calendar years 1998, 1999 and 2000, respectively, and escalated at
3% thereafter. The Alberta average gas price forecast per mmbtu utilized
for the high case was Cdn.$2.00, Cdn.$2.44 and Cdn.$2.51, for the calendar
years 1998, 1999 and 2000, respectively and escalated at 3% thereafter. The
Alberta average gas price forecast per mmbtu utilized for the low case was
Cdn.$1.80, Cdn.$1.92 and Cdn. $2.00 for the calendar years 1998, 1999 and
2000, respectively and escalated at 3% thereafter. The high and low price
forecast analysis resulted in NAV's ranging from Cdn.$6.13 to Cdn.$12.22
per Northstar Common Share.
(iv) Precedent Transaction Multiples Analysis. RBC DS analyzed certain
information with respect to precedent corporate transactions in the oil and
gas industry which were announced between April 1997
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and June 1998 and which RBC DS considered to be the most relevant to the
proposed Arrangement based upon either their comparable size or
cross-border nature. The selected transactions include (indicated as
purchaser/seller): USX-Marathon Group of USX Corporation/Tarragon Oil and
Gas Limited, Dominion Resources Inc./Archer Resources Ltd., Union Pacific
Resources Group Inc./Norcen Energy Resources Limited, Northrock Resources
Ltd./Paragon Petroleum Corporation, Pioneer Natural Resources
Company/Chauvco Resources Ltd., Gulf Canada Resources Limited/Stampeder
Exploration Ltd. and Canadian Occidental Petroleum Ltd./Wascana Energy Inc.
RBC DS also reviewed the Renaissance Energy Ltd./Pinnacle Resources Ltd.
corporate transaction which was in progress at the time. Such analysis
indicated that, among other things: (i) equity value per share as a
multiple of cash flow per share averaged 6.7x and 5.5x for one year and two
year forward forecasts, respectively, (ii) enterprise value as a multiple
of EBITDA averaged 7.7x and 6.1x for one year and two year forward
forecasts, respectively, (iii) adjusted enterprise value as a multiple of
Boe reserves averaged Cdn.$9.62/bbl for proved Boe reserves and
Cdn.$7.23/bbl for proved and probable Boe reserves, and (iv) adjusted
enterprise value as a multiple of daily Boe production averaged Cdn.$23,802
and Cdn.$20,529 per daily Boe for estimated one and two year forecast
production, respectively. The equity value per share as a multiple of cash
flow per share for the oil and gas precedent transactions compares to the
Northstar calendar 1998 and 1999 cash flow multiples of 7.1x and 5.6x,
respectively, at a purchase price of Cdn.$12.28 per Northstar Common Share.
The enterprise value as a multiple of EBITDA for the oil and gas precedent
transactions compares to the Northstar calendar 1998 and 1999 EBITDA
multiples of 8.2x and 6.8x, respectively, at a purchase price of Cdn.$12.28
per Northstar Common Share. The adjusted enterprise value as a multiple of
forecast daily Boe production for the oil and gas precedent transactions
compares to the Northstar calendar 1998 and 1999 daily Boe production
multiples of Cdn.$28,169 and Cdn.$25,165, respectively, at a purchase price
of Cdn.$12.28 per Northstar Common Share. The adjusted enterprise value as
a multiple of proved Boe reserves and proved and probable Boe reserves for
the oil and gas precedent transactions compares to the Northstar proved Boe
reserves and proved and probable Boe reserves multiples of Cdn.$10.45 and
Cdn.$7.66 per Boe, respectively, at a purchase price of Cdn.$12.28 per
Northstar Common Share. RBC DS concluded that the precedent transaction
multiple analysis generated results that are consistent with the price per
Northstar Common Share under the Arrangement.
(v) Comparable Public Company Analysis. RBC DS also reviewed the
trading multiples of public companies involved in oil and gas production
from the perspective of whether a public market value analysis might exceed
NAV or precedent transaction values. However, RBC DS concluded that public
company multiples implied values that were below NAV and precedent
transaction values. Given the foregoing and that public company trading
values reflect the value of board lots of shares which represent minority
control discount values rather than corporate transaction values which
represent the full consideration for purchase of an entire company, RBC DS
did not directly rely on this methodology, but used it as a basis for
comparison and understanding.
(vi) Pro Forma Analysis of the Combination. Based upon various analyst
equity research forecasts of calendar 1998 and 1999 cash flow and earnings
for Devon, the Arrangement, if completed, would be additive to Devon's
forecast cash flow per share in calendar 1998 and 1999 and earnings per
share in calendar 1999. Further, RBC DS considered and analyzed the
potential post announcement trading price of Devon's Common Stock.
Consideration was given to several factors including: (i) post announcement
trading premiums/discounts in comparable transactions, (ii) the proforma
increase to Devon's cash flow per share in calendar 1998 and 1999, (iii)
the amount of new Devon Common Stock being issued in aggregate and relative
to its float, (iv) Devon's research and investor following, (v) the
strategic reasons for the transaction, (vi) the expectation of Devon's
Common Stockholders for a transaction of this nature and (vii) the current
market conditions.
(vii) Review of the Solicitation Process. RBC DS had discussions with
both the management of Northstar and representatives from Morgan Stanley
who had indicated that approaches were made to solicit interest from a
number of parties over the past three months concerning their willingness
to propose some form of transaction and in particular, a merger with
Northstar. In addition, certain parties
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approached Northstar over this period on an unsolicited basis and certain
parties, including Devon, were given access to confidential information.
Devon was the only company to provide a firm offer. In providing its
opinion, RBC DS considered the scope of the solicitation process
undertaken, the likelihood of other potential interested parties, the
potential outcomes of other processes and concluded that the Arrangement
represented the best alternative currently available to Northstar.
RBC DS believes that its analyses must be considered as a whole and that
selecting portions of the analyses or the factors considered by it, without
considering all factors and analyses together, could create a misleading view of
the process underlying the RBC DS Opinion. The preparation of a fairness opinion
is a complex process and is not necessarily susceptible to partial analysis or
summary description. Any attempt to do so could lead to undue emphasis on any
particular factor or analysis. The RBC DS Opinion is not to be construed as a
recommendation to any Northstar Shareholder or Northstar Optionholder as to
whether to vote in favour of the Arrangement Resolution. RBC DS is not
expressing any opinion as to the price at which the Exchangeable Shares will
trade following the completion of the Arrangement.
RBC DS is one of Canada's largest investment banking firms, with operations
in all facets of corporate and government finance, mergers and acquisitions,
equity and fixed income sales, and trading and investment research. The RBC DS
Opinion represents the opinion of RBC DS and the form and content thereof have
been approved for release by a committee of its directors, each of whom is
experienced in merger, acquisition, divestiture and fairness opinion matters.
Northstar selected RBC DS as one of its financial advisors because it is a
nationally recognized investment banking firm in Canada, has substantial
expertise in mergers and acquisitions in the oil and gas sector, and has
extensive knowledge of Northstar and Northstar's business.
On June 12, 1998, the Northstar Board and RBC DS entered into an agreement
(the "Engagement Agreement") pursuant to which the Board requested that RBC DS
provide financial advisory services in connection with any possible business
combination of Northstar and another party. The Northstar Board had previously
engaged Morgan Stanley earlier in 1998. RBC DS was later engaged by Northstar as
its Canadian investment advisor to ensure that all Canadian aspects of any
possible business combination were properly addressed. The terms of the
Engagement Agreement provide that RBC DS is to be paid a fee of approximately
$2.8 million if the Arrangement is completed, and a fee of Cdn.$1.0 million if
the Arrangement is not completed. In addition, RBC DS is to be reimbursed for
any reasonable out-of-pocket expenses and to be indemnified by Northstar against
certain liabilities in certain circumstances.
INTERESTS OF CERTAIN PERSONS IN THE COMBINATION
Management Positions. On the Effective Date, John A. Hagg and Michael M.
Kanovsky, both current members of the Northstar Board, will be appointed to the
Devon Board. Also on the Effective Date, the Northstar Board will be reduced in
size from nine to seven members. Four current Northstar Board members, Mr. Hagg,
Mr. Kanovsky, John W. Burrows and Donald A. Seaman, will remain on the board and
three new members will be added. The new members will be John Richels, currently
Executive Vice President and Chief Financial Officer of Northstar; J. Larry
Nichols, Devon's President, Chief Executive Officer and a director; and H. Allen
Turner, Devon's Vice President -- Corporate Development. The remaining five
current Northstar directors will resign.
Indemnification of Northstar Officers and Directors. Pursuant to the
Combination Agreement, Devon has agreed to maintain all rights to
indemnification existing at the time of execution of the Combination Agreement
in favor of the directors and officers of Northstar and its subsidiaries in
accordance with the charter documents and bylaws of each entity and to the
fullest extent permitted under the ABCA and to continue in effect director and
officer liability insurance for such persons for six years after the Effective
Date.
Northstar Options. On the Effective Date, all Northstar Options will vest
in accordance with their terms. Pursuant to the Plan of Arrangement on the
Effective Date, Devon will assume the Northstar Option Plan and the obligations
of Northstar under each Northstar Option. Each Northstar Option will be
converted into an option to purchase shares of Devon Common Stock. See
"-- Combination Mechanics and Description of Exchangeable Shares -- Northstar
Options."
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Rights on Change of Control. Pursuant to the employment agreements between
Northstar and the executive officers of Northstar, other than John A. Hagg, each
of these executive officers is entitled upon the Arrangement becoming effective,
for a period of six months from the Effective Date, to terminate their
employment with Northstar and to require Northstar to make a lump sum payment
equal to one times (in two cases) or three quarters times (in four cases) such
executive officer's base salary and all other remuneration pursuant to any
profit sharing, incentive or bonus program which the executive officer was
entitled to receive or did receive during the prior 12 month period ended on the
Effective Date. If all of such executive officers elect to terminate their
employment with Northstar, Northstar will be required to pay these executive
officers an aggregate of Cdn.$1.4 million. Devon has had discussions with all of
the senior officers of Northstar. All but one have indicated that they intend to
remain at Northstar. Northstar's Executive Vice President and Chief Financial
Officer, John Richels, has indicated that he will leave Northstar after the
effective date to return to the practice of law.
COMBINATION MECHANICS AND DESCRIPTION OF EXCHANGEABLE SHARES
The following description is qualified in its entirety by reference to the
full text of the Combination Agreement, the Plan of Arrangement and Exchangeable
Share Provisions, the form of Support Agreement and the form of Voting and
Exchange Trust Agreement attached as Annexes B, E, F and G, respectively, to
this Joint Proxy Statement.
Summary
The Plan of Arrangement will provide holders of Northstar Common Shares
with: (i) Exchangeable Shares of Northstar which have the economic and voting
attributes of shares of Devon Common Stock but with no economic or voting rights
in Northstar; and (ii) the right to receive shares of Devon Common Stock
(including the rights under the Rights Agreement) at their election, and
automatically in certain circumstances, in exchange for Exchangeable Shares on a
one-to-one basis.
The primary rights relating to the Exchangeable Shares are: (a) the rights
(Exchange Put Rights and Retraction Rights) to require an exchange by Devon or
redemption by Northstar of Exchangeable Shares for shares of Devon Common Stock;
and (b) overriding rights granted to Devon (Call Rights) to require an exchange
with Devon if a holder exercises its Retraction Rights or in any circumstance
where Northstar would redeem the Exchangeable Shares. Devon anticipates that it
will exercise its Call Rights, when available, and currently foresees no
circumstances under which it would not exercise its Call Rights. Therefore it is
expected that holders of Exchangeable Shares will only receive shares of Devon
Common Stock through an exchange, as opposed to a redemption, of Exchangeable
Shares for shares of Devon Common Stock. While the economic result of an
exchange or a redemption will be the same, the tax consequences would be
substantially different. See "Income Tax Considerations to Northstar
Shareholders and Optionholders -- Canadian Federal Income Tax Consequences to
Northstar Shareholders and Optionholders." Certain automatic or event triggered
rights (Automatic Redemption, Optional Exchange Right, Automatic Exchange Right,
Liquidation Call Right and Redemption Call Right) will result in the exchange or
redemption of Exchangeable Shares for shares of Devon Common Stock, without any
action by the holders of Exchangeable Shares.
The Arrangement
Pursuant to the terms of the Plan of Arrangement, at the Effective Time:
(i) Northstar will amend its articles of amalgamation to authorize an unlimited
number of Exchangeable Shares; (ii) Northstar will amend its articles of
amalgamation to authorize the issuance of one Class A Preferred Share; (iii)
Northstar will issue one Class A Preferred Share to Devon in exchange for one
share of Devon Common Stock; (iv) each outstanding Northstar Common Share (other
than Northstar Common Shares held by holders who have properly exercised their
rights of dissent and are ultimately entitled to be paid fair value for their
shares) will be exchanged for 0.227 Exchangeable Shares or, at the election of
the holder pursuant to the Exchange Put Right, indirectly for the same number of
shares of Devon Common Stock (subject to the Exchange Ratio Adjustment) and
Northstar will become a subsidiary of Devon; (v) the one Class A Preferred Share
held by Devon will be exchanged for one Northstar Common Share; (vi) Northstar
will amend its articles of amalgamation to delete all preferred shares from its
authorized capital; and (vii) each outstanding Northstar
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Option (other than Northstar Options held by holders who have properly exercised
their rights of dissent and are ultimately entitled to be paid fair value for
their options) will be converted into an option to purchase the number of shares
of Devon Common Stock determined by multiplying the number of Northstar Common
Shares subject to such option at the Effective Time by the Exchange Ratio, at an
exercise price per share of Devon Common Stock equal to the exercise price per
share, converted to U.S. dollars, of such Northstar Option, immediately prior to
the Effective Time divided by the Exchange Ratio.
Enclosed with copies of this Joint Proxy Statement delivered to the
registered Northstar Shareholders is the Northstar Letter of Transmittal, which,
when duly completed and returned together with a certificate for Northstar
Common Shares, will enable the holder to exchange such Northstar Common Shares
for the number of Exchangeable Shares to which such holder is entitled or, at
the election of the holder pursuant to the Exchange Put Right, the equivalent
number of shares of Devon Common Stock. Northstar will provide notice to
Northstar Optionholders of the adjustment in the number of shares of Devon
Common Stock issuable thereunder and the exercise price calculated in accordance
with the Plan of Arrangement. See "Procedures for Exchange by Northstar
Shareholders and Northstar Optionholders."
The Exchangeable Shares are subject to adjustment or modification in the
event of a stock split or other changes to the capital structure of Devon so as
to maintain the initial one-to-one ratio between the Exchangeable Shares and
Devon Common Stock.
Exchange and Redemption Rights
Under the Voting and Exchange Trust Agreement, Devon will grant the
Exchange Rights, including the Exchange Put Right, to the Trustee for the
benefit of the holders of the Exchangeable Shares. Pursuant to the Exchangeable
Share Provisions, the holders of Exchangeable Shares will have the right to
retract (i.e., require Northstar to redeem), any or all of their Exchangeable
Shares. Different Canadian federal income tax consequences to a holder of
Exchangeable Shares and to Northstar may arise depending upon whether the
relevant exchange or redemption is ultimately effected by Devon or Northstar.
See "Income Tax Considerations to Northstar Shareholders and Optionholders."
Exchange Put Right. A holder of the Exchangeable Shares will be entitled at
any time at or following the Effective Time to require Devon to exchange all or
any part of the Exchangeable Shares owned by such holder and to receive an
equivalent number of shares of Devon Common Stock, plus the Dividend Amount, if
any. The Exchange Put Right may be exercised at any time by notice in writing
(which may be in the form of the panel, if any, on the certificates for
Exchangeable Shares or by completing the Northstar Letter of Transmittal) given
by the holder to and received by the Trustee or accompanied by presentation and
surrender of the certificates representing such Exchangeable Shares, together
with such other documents and instruments that may be required to effect a
transfer of Exchangeable Shares as provided in the Exchangeable Share
Provisions, at the principal transfer offices in Calgary, Alberta or Toronto,
Ontario of the Trustee and at such other places as may be determined from time
to time. An exchange pursuant to this right will be completed not later than the
close of business on the third Business Day following receipt by the Trustee of
the notice, the certificates and such other required documents.
Different Canadian federal income tax consequences to a holder of
Exchangeable Shares may arise depending upon whether the relevant exchange or
redemption is ultimately effected by Devon or Northstar. The Exchange Put Right
allows holders to acquire shares of Devon Common Stock directly from Devon
through an exchange at any time (with settlement to occur within three Business
Days) and thereby to control the timing of the recognition of gain or loss (if
any) for tax purposes on receipt of Devon Common Stock. Pursuant to their
retraction rights, holders of Exchangeable Shares may request Northstar to
redeem their shares for Devon Common Stock and thereby give Devon the option to
effect the exchange itself. However, Devon may forego the option to exchange
pursuant to a Retraction Request, thereby forcing the holder to accept a
redemption. See "-- Retraction Rights."
Retraction Rights. A holder of the Exchangeable Shares will be entitled at
any time following the Effective Time to require Northstar to retract (i.e.,
require Northstar to redeem) any or all such Exchangeable Shares owned by such
holder and to receive an equivalent number of shares of Devon Common Stock, plus
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the Dividend Amount, if any. Holders of the Exchangeable Shares may effect such
retraction by presenting the appropriate share certificates to Northstar or the
Trustee representing the number of Exchangeable Shares the holder desires to
retract, together with a duly executed Retraction Request specifying the number
of Exchangeable Shares the holder wishes to retract and the Retraction Date
(which shall not be less than five nor more than ten Business Days after the
date on which Northstar receives the Retraction Request from the holder), and
such other documents and instruments as may be required to effect the retraction
of the Exchangeable Shares.
Upon receipt of the Exchangeable Shares, the Retraction Request and other
required documentation and instruments from the holder thereof, Northstar must
immediately notify Devon of such Retraction Request. Devon will thereafter have
two Business Days in which to exercise its Retraction Call Right. In the event
Devon determines not to exercise its Retraction Call Right and provided that the
Retraction Request is not revoked in accordance with the Exchangeable Share
Provisions, Northstar is obligated to deliver to the holder not later than the
Retraction Date the number of shares of Devon Common Stock equal to the number
of Exchangeable Shares submitted by the holder for retraction, plus the Dividend
Amount, if any. Devon will be obligated to provide such shares of Devon Common
Stock to Northstar to comply with the Retraction Request.
Automatic Redemption. Subject to applicable law and the Redemption Call
Rights of Devon described below, on an Automatic Redemption Date, Northstar will
redeem all but not less than all of the then outstanding Exchangeable Shares in
exchange for an equal number of shares of Devon Common Stock, plus the Dividend
Amount, if any. Notwithstanding any proposed redemption of the Exchangeable
Shares, Devon will, pursuant to Redemption Call Rights, have the overriding
right to acquire on an Automatic Redemption Date all but not less than all of
the outstanding Exchangeable Shares in exchange for one share of Devon Common
Stock for each such Exchangeable Share, plus the Dividend Amount, if any. An
Automatic Redemption Date is the first to occur of: (i) the 10th anniversary of
the Effective Date; (ii) the date selected by the Northstar Board (such date to
be no earlier than the third anniversary of the Effective Date) at a time when
less than 5% of the number of Exchangeable Shares issuable on the Effective Date
(other than Exchangeable Shares held by Devon and its Subsidiaries, and as such
number of shares may be adjusted as deemed appropriate by the Northstar Board to
give effect to any subdivision or consolidation of or stock dividend on the
Exchangeable Shares, any issuance or distribution of rights to acquire
Exchangeable Shares or securities exchangeable for or convertible into or
carrying rights to acquire Exchangeable Shares, any issue or distribution of
other securities or rights or evidences of indebtedness or assets, or any other
capital reorganization or other transaction involving or affecting the
Exchangeable Shares) are outstanding; (iii) the Business Day prior to the record
date for any meeting or vote of the Northstar Shareholders to consider any
matter on which the holders of Exchangeable Shares would be entitled to vote as
Northstar Shareholders, but excluding any meeting or vote as described in clause
(iv) below; (iv) the Business Day following the day on which the holders of
Exchangeable Shares fail to take the necessary action at a meeting or other vote
of holders of Exchangeable Shares, if and to the extent such action is required,
to approve or disapprove, as applicable, any change to, or in the rights of the
holders of, Exchangeable Shares, if the approval or disapproval, as applicable,
of such change would be required to maintain the economic and legal equivalence
of the Exchangeable Shares and the Devon Common Stock; or (v) the date on which
the share purchase rights issued pursuant to the Rights Agreement (or pursuant
to any similar successor or replacement rights agreement) separate from the
Devon Common Stock and become exercisable. At least 45 days before an Automatic
Redemption Date or before a possible Automatic Redemption Date which may result
from a failure of the holders of Exchangeable Shares to take necessary action as
described in clause (iv) above, Northstar shall provide the registered holders
of Exchangeable Shares with written notice of the proposed redemption or
possible redemption of the Exchangeable Shares by Northstar. In the case of any
notice given in connection with a possible Automatic Redemption Date, such
notice will be given contingently and will be withdrawn if the contingency does
not occur.
Optional Exchange Right. Subject to Devon's Liquidation Call Right
described below, upon the occurrence and during the continuance of a Northstar
Insolvency Event, a holder of Exchangeable Shares will be entitled to instruct
the Trustee to exercise the Optional Exchange Right with respect to any or all
of the
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Exchangeable Shares held by such holder, thereby requiring Devon to acquire such
Exchangeable Shares from the holder. Immediately upon the occurrence of a
Northstar Insolvency Event or any event which may with the passage of time or
the giving of notice, become a Northstar Insolvency Event, Northstar and Devon
will give written notice thereof to the Trustee. As soon as practicable
thereafter, the Trustee will notify each holder of Exchangeable Shares of such
event or potential event and will advise the holder of its rights with respect
to the Optional Exchange Right.
The consideration for each Exchangeable Share to be acquired under the
Optional Exchange Right will be one share of Devon Common Stock, plus the
Dividend Amount, if any.
If, as a result of liquidity or solvency requirements or other provisions
of applicable law, Northstar is not permitted to redeem all of the Exchangeable
Shares tendered for retraction by a holder in accordance with the Exchangeable
Share Provisions as described under "-- Retraction Rights" above, the holder
will be deemed to have exercised the Optional Exchange Right with respect to the
unredeemed Exchangeable Shares, and Devon will be required to purchase such
shares from the holder in the manner set forth above under "-- Retraction
Rights."
Automatic Exchange Right. In the event of a Devon Liquidation Event, Devon
will be deemed to have purchased each outstanding Exchangeable Share and each
holder of Exchangeable Shares will be deemed to have sold the Exchangeable
Shares held by it on the basis of one share of Devon Common Stock, plus the
Dividend Amount, if any, for each such Exchangeable Share.
Call Rights
In the circumstances described below, Devon will have certain overriding
rights to acquire Exchangeable Shares from holders thereof by delivering one
share of Devon Common Stock, plus the Dividend Amount, if any, for each
Exchangeable Share acquired. Different Canadian federal income tax consequences
to a holder of Exchangeable Shares and to Northstar may arise depending upon
whether the Call Rights are exercised by Devon or whether the relevant
Exchangeable Shares are redeemed by Northstar pursuant to the Exchangeable Share
Provisions. See "Income Tax Considerations to Northstar Shareholders and
Optionholders."
Retraction Call Right. Pursuant to the Exchangeable Share Provisions, a
holder requesting Northstar to redeem the Exchangeable Shares will be deemed to
offer such shares to Devon, and Devon will have an overriding Retraction Call
Right to acquire all, but not less than all, of the Exchangeable Shares that the
holder has requested Northstar to redeem in exchange for one share of Devon
Common Stock, plus the Dividend Amount, if any, in exchange for each
Exchangeable Share. See " -- Exchange and Redemption Rights -- Retraction
Rights."
Liquidation Call Right. Pursuant to the Plan of Arrangement, Devon will be
granted an overriding Liquidation Call Right, in the event of and
notwithstanding a proposed liquidation, dissolution or winding-up of Northstar
or any other distribution of the assets of Northstar among its shareholders for
the purpose of winding-up its affairs, to acquire all, but not less than all, of
the Exchangeable Shares then outstanding in exchange for Devon Common Stock,
plus the Dividend Amount, if any. Upon the exercise by Devon of the Liquidation
Call Right, the holders of the Exchangeable Shares will be obligated to transfer
such shares to Devon. The acquisition by Devon of all of the outstanding
Exchangeable Shares upon the exercise of the Liquidation Call Right will occur
on the effective date of the voluntary or involuntary liquidation, dissolution
or winding-up of Northstar.
Redemption Call Right. Pursuant to the Plan of Arrangement, Devon will be
granted an overriding Redemption Call Right, notwithstanding the proposed
automatic redemption of the Exchangeable Shares by Northstar pursuant to the
Exchangeable Share Provisions, to acquire on the Automatic Redemption Date all,
but not less than all, of the Exchangeable Shares then outstanding in exchange
for Devon Common Stock, plus the Dividend Amount, if any, and, upon the exercise
by Devon of the Redemption Call Right, the holders of the Exchangeable Shares
will be obligated to transfer such shares to Devon.
Effect of Call Right Exercise. If Devon exercises one or more of its Call
Rights, it will directly issue Devon Common Stock to holders of Exchangeable
Shares and will become the holder of such Exchangeable
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Shares. Devon will not be entitled to exercise any voting rights attached to the
Exchangeable Shares it so acquires. If Devon declines to exercise its Call
Rights when applicable, it will be required, pursuant to the Support Agreement,
to issue Devon Common Stock as Northstar directs, including to Northstar, which
will, in turn, transfer such stock to the holders of Exchangeable Shares in
consideration for the return and cancellation of such Exchangeable Shares. In
the event Devon does not exercise its Call Rights when applicable and instead
delivers shares of Devon Common Stock as Northstar directs, including to
Northstar in accordance with the Support Agreement, the economic result for
holders of the Exchangeable Shares would be the same, while the Canadian tax
consequences would be substantially different. See "Income Tax Considerations to
Northstar Shareholders and Optionholders -- Canadian Federal Income Tax
Considerations to Northstar Shareholders and Optionholders." HOWEVER, DEVON
ANTICIPATES THAT IT WILL EXERCISE ITS CALL RIGHTS, WHEN AVAILABLE, AND CURRENTLY
FORESEES NO CIRCUMSTANCES UNDER WHICH IT WOULD NOT EXERCISE ITS CALL RIGHTS. In
addition, Devon does not anticipate any restriction or limitation on the number
of Exchangeable Shares it would acquire upon the exercise of its Call Rights.
Voting, Dividend and Liquidation Rights of Holders of Exchangeable Shares
On the Effective Date, Devon, Northstar and the Trustee will enter into the
Voting and Exchange Trust Agreement in the form attached hereto as Annex G.
Under the Voting and Exchange Trust Agreement, Devon will issue to and deposit
with the Trustee the Voting Share for the benefit of the holders (other than
Devon and its Subsidiaries) of the Exchangeable Shares. The Voting Share will
carry a number of votes, exercisable at any meeting at which Devon Stockholders
are entitled to vote or with respect to any consent sought from the Devon
Stockholders, equal to the number of outstanding Exchangeable Shares (other than
Exchangeable Shares held by Devon and its Subsidiaries).
Each holder of an Exchangeable Share (other than Devon and its
Subsidiaries) on the record date for any meeting at which Devon Stockholders are
entitled to vote will be entitled to instruct the Trustee to exercise one of the
votes attached to the Voting Share for each Exchangeable Share held by such
holder. The Trustee will exercise each vote attached to the Voting Share only as
directed by the relevant holder of Exchangeable Shares and, in the absence of
instructions from a holder as to voting, will not exercise such votes. A holder
may, upon instructing the Trustee, obtain a proxy from the Trustee entitling the
holder to vote directly at the relevant meeting the votes attached to the Voting
Share to which the holder is entitled.
The Trustee will send to the holders of the Exchangeable Shares the notice
of each meeting at which the Devon Stockholders are entitled to vote, together
with the related meeting materials and a statement as to the manner in which the
holder may instruct the Trustee to exercise the votes attached to the Voting
Share, at the same time as Devon sends such notice and materials to Devon
Stockholders. The Trustee will also send to the holders copies of all proxy,
financial and information statements and other related materials sent by Devon
to Devon Stockholders at the same time as such materials are sent to the Devon
Stockholders. To the extent such materials are provided to the Trustee by Devon,
the Trustee will also send to the holders all materials sent by third parties to
Devon Stockholders, including dissident proxy and information circulars and
tender and exchange offer circulars, as soon as possible after such materials
are first sent to Devon Stockholders.
All rights of a holder of Exchangeable Shares to exercise votes attached to
the Voting Share will cease upon the exchange of all such holder's Exchangeable
Shares for shares of Devon Common Stock.
Holders of Exchangeable Shares shall be entitled to receive, and the
Northstar Board shall, on each date on which the Devon Board declares a dividend
on Devon Common Stock, declare a dividend: (i) in the case of a cash dividend
declared on the Devon Common Stock, in an amount in cash for each Exchangeable
Share equal to the cash dividend declared on each share of Devon Common Stock;
(ii) in the case of a stock dividend declared on the Devon Common Stock to be
paid in Devon Common Stock, in such number of Exchangeable Shares for each
Exchangeable Share as is equal to the number of shares of Devon Common Stock to
be paid on each share of Devon Common Stock; (iii) in the case of a dividend
declared on the Devon Common Stock in property other than cash or securities of
Devon, in such type and amount of property for each Exchangeable Share as is the
same type and amount of property declared as a dividend on each share of Devon
Common Stock; or (iv) in the case of a dividend declared on the Devon Common
Stock to be paid in
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securities of Devon other than Devon Common Stock, in such number of either such
securities or economically equivalent securities of Northstar, as the Northstar
Board determines, for each Exchangeable Share as is equal to the number of
securities of Devon to be paid on each share of Devon Common Stock.
Upon the occurrence of a Northstar Insolvency Event, holders of the
Exchangeable Shares will have preferential rights to receive from Northstar one
share of Devon Common Stock for each Exchangeable Share they hold, plus the
Dividend Amount, if any. In the event of a proposed Northstar Insolvency Event,
pursuant to the Liquidation Call Right, Devon will have the overriding right to
purchase all of the outstanding Exchangeable Shares from the holders thereof at
the effective time of any such Northstar Insolvency Event in exchange for one
share of Devon Common Stock, plus the Dividend Amount, if any, for each such
Exchangeable Share.
Upon the occurrence of a Devon Liquidation Event, in order for the holders
of the Exchangeable Shares to participate on a pro rata basis with the holders
of Devon Common Stock, each holder of Exchangeable Shares will automatically
have the right pursuant to the Automatic Exchange Right to receive in exchange
therefor an equivalent number of shares of Devon Common Stock, plus the Dividend
Amount, if any. For a description of certain Devon obligations with respect to
the voting, dividend and liquidation rights of the holders of Exchangeable
Shares, see "-- Support Agreement."
Support Agreement
The following description is qualified in its entirety by reference to the
full text of the Support Agreement attached as Annex F to this Joint Proxy
Statement.
The Support Agreement provides that Devon will: (i) not declare or pay
dividends on the Devon Common Stock unless Northstar is able to and
simultaneously declares and pays an equivalent dividend on the Exchangeable
Shares; (ii) cause Northstar to declare and pay an equivalent dividend on the
Exchangeable Shares simultaneously with Devon's declaration and payment of
dividends on the Devon Common Stock; (iii) advise Northstar in advance of the
declaration of any dividend on the Devon Common Stock and ensure that the
declaration date, record date and payment date for dividends on the Exchangeable
Shares are the same as that for the Devon Common Stock; (iv) take all actions
and do all things necessary to ensure that Northstar is able to provide to the
holders of the Exchangeable Shares the equivalent number of shares of Devon
Common Stock, plus the Dividend Amount, if any, in the event of a liquidation,
dissolution, or winding-up of Northstar, a Retraction Request by a holder of
Exchangeable Shares or a redemption of Exchangeable Shares of Northstar; and (v)
neither exercise its vote as a direct or indirect shareholder to initiate the
voluntary liquidation, dissolution or winding-up of Northstar nor take any
action or omit to take any action that is designed to result in the liquidation,
dissolution or winding-up of Northstar.
The Support Agreement also provides that, without the prior approval of
Northstar and the holders of the Exchangeable Shares, Devon will not distribute
additional shares of Devon Common Stock or rights to subscribe therefor,
evidences of indebtedness or assets to all or substantially all of the holders
of shares of Devon Common Stock, or change the Devon Common Stock unless the
same or an economically equivalent distribution or change to the Exchangeable
Shares (or in the rights of the holders thereof) is made simultaneously. An
Automatic Redemption Date (see "-- Exchange and Redemption Rights -- Automatic
Redemption") will occur if the holders of Exchangeable Shares fail to approve,
if required, any such economically equivalent change. The Support Agreement also
provides that, in the event any tender offer, share exchange offer, issuer bid,
take-over bid or similar transaction with respect to the Devon Common Stock is
proposed by Devon, recommended by the Devon Board or is otherwise effected or to
be effected with the consent or approval of the Devon Board, Devon will take all
necessary and desirable action to enable holders of the Exchangeable Shares to
participate in such transaction on an equivalent basis as the holders of Devon
Common Stock.
In addition, so long as there remain outstanding any Exchangeable Shares
not owned by Devon or any entity controlled by Devon, Devon will remain the
beneficial owner, directly or indirectly, of all outstanding Northstar Common
Shares and of at least 50.1% of all other outstanding securities of Northstar
carrying or entitled to voting rights generally for the election of Northstar
directors.
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With the exception of administrative changes for the purpose of adding
covenants for the protection of the holders of the Exchangeable Shares, making
certain necessary amendments or curing ambiguities or clerical errors (in each
case provided that the board of directors of each of Devon and Northstar is of
the opinion that such amendments or modifications are not prejudicial to the
interests of the holders of the Exchangeable Shares), the Support Agreement may
not be amended without the approval of the holders of the Exchangeable Shares.
Under the Support Agreement, Devon will not exercise any voting rights
attached to the Exchangeable Shares owned by it or any entity controlled by it
on any matter considered at meetings of holders of Exchangeable Shares.
In order for Devon to perform its obligations in accordance with the
Support Agreement, Northstar must notify Devon of the occurrence of certain
events, such as the liquidation, dissolution or winding-up of Northstar, and
Northstar's receipt of a Retraction Request from a holder of Exchangeable
Shares.
Devon's Amended and Restated Certificate
Devon's Amended and Restated Certificate, to be filed with the Secretary of
State of Oklahoma on the Effective Date, incorporates the terms of the proposed
amendment which authorizes one share of Special Voting Stock. See "Proposed
Certificate Amendment."
Northstar Options
At the Effective Time and pursuant to the Arrangement, Devon will assume
the obligations of Northstar under the Northstar Option Plan and under each
Northstar Option other than Northstar Options held by holders who have validly
exercised their right of dissent. Each Northstar Option will be converted into
an option exercisable for a number of whole shares of Devon Common Stock equal
to the number of Northstar Common Shares subject to such Northstar Option at the
Effective Time multiplied by the Exchange Ratio, rounded down to the nearest
whole number of shares, at an exercise price per share of Devon Common Stock
equal to the exercise price per share of such Northstar Option, converted into
U.S. dollars, immediately prior to the Effective Time divided by the Exchange
Ratio. For the purposes of this adjustment, the U.S. dollar/ Cdn. dollar
exchange rate shall be based on the noon buying rate (expressed to the fourth
decimal place) on the Effective Date, as reported by the Federal Reserve Bank of
New York.
Delivery of Devon Common Stock
Pursuant to the Support Agreement and the Voting and Exchange Trust
Agreement, Devon will ensure that all shares of Devon Common Stock to be
delivered by it under the Support Agreement or on the exercise of the Exchange
Rights under the Voting and Exchange Trust Agreement are duly registered,
qualified or approved under applicable Canadian and United States securities
laws, if required, so that such shares may be freely traded by the holder
thereof (other than any restriction on transfer by reason of a holder being a
"control person" of Devon for purposes of Canadian securities law or an
"affiliate" of Devon for purposes of United States securities law). In addition,
Devon will take all actions necessary to cause all such shares of Devon Common
Stock to be listed or quoted for trading on all stock exchanges or quotation
systems on which outstanding shares of Devon Common Stock are then listed or
quoted for trading. The shares of Devon Common Stock to be issued upon exercise
of currently outstanding Northstar Options will be registered under the
Securities Act. Devon will use its best efforts to maintain the effectiveness of
such registration for so long as such options remain outstanding.
THE COMBINATION AGREEMENT
The following description is qualified in its entirety by reference to the
full text of the Combination Agreement attached as Annex B to this Joint Proxy
Statement.
Exchange Ratio Adjustment. Under the Combination Agreement, the basic
Exchange Ratio is subject to the Exchange Ratio Adjustment. The Exchange Ratio
Adjustment would come into effect if the Pre-
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Meeting Average Price of Devon Common Stock on the AMEX during the Measurement
Period multiplied by 0.227 is less than Cdn. $11.00 per share, in which case the
Exchange Ratio is adjusted to a maximum of 0.235. For purposes of this
adjustment, the U.S. dollar/Cdn. dollar exchange rate for determining the Pre-
Meeting Average Price shall be based upon the average of the noon buying rate
for each of the days in the Measurement Period as reported by the Federal
Reserve Bank of New York.
Representations, Warranties and Covenants. The Combination Agreement
contains certain customary representations and warranties of each of Northstar
and Devon relating to, among other things, their respective organization,
capital structures, qualifications, operations, financial condition,
intellectual property rights, compliance with necessary regulatory or
governmental authorities and other matters, including their authority to enter
into the Combination Agreement and to consummate the Combination. Pursuant to
the Combination Agreement, each party has covenanted that, until the earlier of
the termination of the Combination Agreement or the Effective Time, it will
maintain its business, it will not take certain actions outside the ordinary
course without the other's consent and it will use its reasonable best efforts
to consummate the Combination. The parties have also agreed to advise each other
of material changes and to provide the other with interim financial information.
Further, the parties have agreed to apply for and use their reasonable best
efforts to obtain all regulatory and other consents and approvals required for
the consummation of the transactions contemplated by the Combination Agreement,
to use their reasonable best efforts to effect the transactions contemplated by
the Combination Agreement, including the preparation and mailing of this Joint
Proxy Statement, and to provide the other party and its counsel with such
information as they may reasonably request. Devon has also agreed that all
rights to indemnification under the charter documents and bylaws of Northstar
and its subsidiaries for directors and officers of Northstar will survive the
Arrangement and remain in full force and effect. In addition, Devon has agreed
to use its reasonable best efforts to list the shares of Devon Common Stock
issued upon exchange of the Exchangeable Shares on the AMEX and, with the
cooperation and assistance of Northstar, to list the Exchangeable Shares on the
TSE or another recognized Canadian stock exchange.
The Combination Agreement also provides that until the earlier of the
Effective Time or the termination of the Combination Agreement, without the
prior written consent of Devon, Northstar and its Subsidiaries will not, and
they will not authorize or permit any of their officers, directors, employees,
financial advisors, representatives and agents ("Representatives"), to directly
or indirectly, solicit, initiate or encourage (including by way of furnishing
information) or take any other action to facilitate any inquiries or the making
of any proposal which constitutes or may reasonably be expected to lead to an
Acquisition Proposal (as defined below) from any person, or engage in any
discussion or negotiations relating thereto or accept any Acquisition Proposal.
Notwithstanding the foregoing, Northstar may at any time prior to the time
Northstar Shareholders have voted to approve the Plan of Arrangement and the
other transactions contemplated thereby: (i) engage in discussions or
negotiations with a third party who (without any solicitation, initiation or
encouragement, directly or indirectly, by Northstar or its Subsidiaries or any
of their Representatives described above) seeks to initiate such discussions or
negotiations and may furnish such third party information concerning Northstar
and its business, properties and assets, if, and only to the extent that: the
third party has first made an Acquisition Proposal that is financially superior
to the transactions contemplated by the Combination Agreement and the third
party has demonstrated that the funds or other consideration necessary are
reasonably likely to be available, as determined in good faith by the Northstar
Board after receiving the written advice of its financial advisors (a "Superior
Proposal") and the Northstar Board has concluded in good faith, after
considering applicable law and receiving the written advice of outside counsel
that such action is necessary for the Northstar Board to act in a manner
consistent with its fiduciary duties under applicable law; prior to furnishing
such information to or entering into discussions with such person or entity,
Northstar provides prompt notice to Devon to the effect that it is furnishing
information or entering into discussions or negotiations with such person or
entity in respect of a Superior Proposal and receives from such person or entity
an executed confidentiality agreement in reasonably customary form; Northstar
provides prompt notice to Devon at such time as it is terminating any such
discussions or negotiations with such person or entity; and Northstar provides
to Devon any information provided to any such person or entity not previously
made available to Devon; (ii) comply with certain rules relating to tender or
exchange offers under the Exchange Act and similar rules under Canadian
securities laws relating to the provision of directors'
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circulars, and make appropriate disclosure with respect thereto to Northstar's
Shareholders; and (iii) accept, recommend, approve or implement a Superior
Proposal from a third party, but only (in the case of this clause (iii)) if
prior to such acceptance, recommendation, approval or implementation, the
Northstar Board shall have concluded in good faith, after considering provisions
of applicable law and after giving effect to all proposals to adjust the terms
and conditions of the Combination Agreement and the Arrangement which may be
offered by Devon during the five day notice period set forth below and after
receiving the written advice of outside counsel, that such action is necessary
for the Northstar Board to act in a manner consistent with its fiduciary duties
under applicable law and Northstar terminates the Combination Agreement.
Northstar shall give Devon orally and in writing at least five days advance
notice of any decision by the Northstar Board to accept, recommend, approve or
implement a Superior Proposal, which notice shall identify the party making the
Superior Proposal and shall provide full details of all material terms and
conditions thereof. In addition Northstar shall, and shall cause its respective
financial and legal advisors to, negotiate in good faith with Devon to make such
adjustments in the terms and conditions of the Combination Agreement and of the
Arrangement as would enable Northstar to proceed with the transactions
contemplated by the Combination Agreement. In the event the Combination
Agreement and the Arrangement are amended as provided above (including without
limitation if Devon and Northstar agree to mutually acceptable adjustments as
provided above), then Northstar shall not enter into any agreement regarding the
Superior Proposal. As used herein, "Acquisition Proposal" shall mean a proposal
or offer (other than by Devon), whether or not subject to a due diligence
condition, to acquire beneficial ownership (as defined under Rule 13(d) of the
Exchange Act) of all or a material portion of the assets of, or any material
equity interest in, Northstar or its material Subsidiaries pursuant to a merger,
consolidation or other business combination, by means of a sale of shares of
capital stock, sale of assets, tender offer or exchange offer or similar
transaction involving Northstar or any of its material Subsidiaries including
without limitation any single or multi-step transaction or series of related
transactions which is structured to permit such third party to acquire
beneficial ownership or any material portion of the assets of, or any material
portion of the equity interest in, Northstar or any of its material Subsidiaries
(other than the transactions contemplated by the Combination Agreement),
provided however, in no event shall an underwritten public or private sale of
Northstar Common Shares (aggregating less than 50% of the currently issued and
outstanding Northstar Common Shares), which is not made in connection with a
merger, consolidation or other business combination, be deemed to be an
Acquisition Proposal.
Conditions to Closing. The Combination Agreement provides that the
respective obligations of each party to complete the Combination are subject to
the satisfaction or waiver before the Effective Date of the following
conditions: (i) the Combination Agreement, the Arrangement and other
transactions contemplated by the Combination Agreement shall have been approved
and adopted by the required vote of the holders of Northstar Common Shares and
Northstar Options in accordance with applicable law and the Northstar Articles
and Northstar Bylaws, and Northstar shall not have received on or prior to the
Effective Time notice from the holders of more than 10% of the issued and
outstanding Northstar Common Shares and Northstar Options of their intention to
exercise any rights of dissent; (ii) the Combination Agreement and the
transaction contemplated thereby and the amendment of Devon's Certificate of
Incorporation to authorize the Special Voting Stock shall have been approved by
the Devon Stockholders in accordance with the rules of the AMEX, applicable law
and Devon's Certificate of Incorporation and bylaws; (iii) no order shall have
been entered and remain in effect in any action or proceeding before any
governmental entity that would prevent or make illegal the consummation of the
Arrangement; (iv) with respect to the consummation of the Combination and the
transactions contemplated by the Combination Agreement, among other things: (a)
all regulatory orders and approvals that are legally required shall have been
obtained; (b) all waiting periods required by the Hart-Scott-Rodino Antitrust
Improvements Act of 1976, as amended, shall have expired, or early termination
with respect thereto shall have been obtained, without the imposition of any
governmental request or order requiring the sale or disposition or holding
separate (through a trust or otherwise) of a material portion of the assets or
businesses of Northstar or Devon; and (c) Devon and Northstar shall each have
filed all notices and information required under Part IX of the Competition Act
and the applicable waiting periods and any extensions thereof shall have expired
or the parties shall have received an Advance Ruling Certificate pursuant to
Section 102 of the Competition Act setting out that the Director under such Act
is satisfied he would not have sufficient grounds on which to apply for an order
in respect of the Arrangement
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and the Arrangement shall have received the allowance or approval or deemed
allowance or approval, by the responsible Minister under the Investment Canada
Act in respect of the Arrangement, to the extent such allowance or approval is
required, on terms and conditions satisfactory to the parties; (v) any
Registration Statement required under the Securities Act to register the Devon
Common Stock to be issued in exchange for Exchangeable Shares shall have been
declared effective on or before the Effective Date, and at its effective date
and on the Closing Date, the Registration Statement shall not be the subject of
any stop-order or proceedings seeking a stop-order, and this Joint Proxy
Statement shall on the Closing Date not be subject to any similar proceedings
commenced or threatened by the SEC or the applicable Canadian provincial
securities commissions or regulatory authorities; (vi) the Devon Common Stock to
be issued from time to time after the Effective Time upon exchange of the
Exchangeable Shares shall have been approved for listing on the AMEX and the
Exchangeable Shares shall be listed on the TSE or another recognized Canadian
stock exchange; (vii) the representations and warranties of the parties shall be
true and correct as though made at and as of the Effective Time, unless the
failure to be true and correct would not have a Material Adverse Effect on the
relevant party; (viii) the parties shall have performed all agreements and
covenants to be performed by them under the Combination Agreement, except where
non-performance would not have a Material Adverse Effect on either party; and
(ix) the parties shall have furnished copies to each other of all affiliates
agreements referred to in the Combination Agreement.
Each condition to closing may be waived by either or both parties, as
appropriate, except for conditions to closing that relate to approvals required
by applicable law.
Termination. The Combination Agreement may be terminated by mutual
agreement of the parties at any time prior to the Effective Time. Also, either
party may terminate the Combination Agreement prior to the Effective Time if:
(i) there has been a breach of any representation, warranty, covenant or
agreement contained in the Combination Agreement on the part of the other party,
which breach has or could reasonably be expected to have a Material Adverse
Effect on such party, and such breach has not been cured within 15 business days
after notice thereof; (ii) all conditions for closing the Combination have not
been satisfied or waived by March 31, 1999 (other than as a result of a breach
by the terminating party); (iii) any required approval of the Northstar
Shareholders and Northstar Optionholders or the Devon Stockholders shall not
have been obtained; (iv) any final and non-appealable order shall have been
entered in any action or proceeding before any governmental entity that
prohibits or renders illegal the consummation of the Combination; or (v) the
board of directors of the other party or any committee of such board of
directors withdraws or modifies in any adverse manner its approval or
recommendation of the Combination Agreement, the Arrangement and the other
transactions contemplated in the Combination Agreement (other than, in the case
of the Northstar Board approval or recommendation in connection with a Superior
Proposal described below) (a "Board Withdrawal"). In addition, Northstar shall
have the right to terminate the Combination Agreement: (i) prior to the approval
of the Combination Agreement, the Arrangement and the other transactions
contemplated thereby by the securityholders of Northstar if, as a result of a
Superior Proposal by a party other than Devon or any of its affiliates, the
Northstar Board determines in accordance with the requirements prescribed in the
Combination Agreement to accept, recommend, approve or implement such Superior
Proposal and has otherwise complied with the provisions of the Combination
Agreement in respect thereof; and (ii) if Devon shall have approved, or agreed
to or announced any agreement to effect, any transaction or transactions that
would result in any person, or any group of persons acting jointly or in concert
acquiring beneficial ownership of more than 50% of the issued and outstanding
capital stock of Devon or in Devon disposing of more than 50% of its assets
("Change of Control Transaction").
Upon termination of the Combination Agreement in accordance with the terms
thereof, neither party nor their respective officers or directors shall have any
further liability under the agreement except with respect to the termination
fees described below, but the Confidentiality Agreement dated June 16, 1998,
shall survive any such termination and neither party shall be released from any
liability arising from the willful breach by such party of any of its
representations, warranties, covenants or agreements contained in the
Combination Agreement.
Termination Fee. If Northstar terminates the Combination Agreement because
there has been a breach of any representation, warranty, covenant or agreement
contained in the Combination Agreement by Devon,
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which has been or could reasonably be expected to have a Material Adverse Effect
on Devon and such breach has not been cured within 15 business days after notice
or if either party terminates the Combination Agreement because the required
approval of the Devon Stockholders has not been obtained, then Devon shall pay
Northstar a cash termination fee of Cdn. $4,000,000 at the time of termination.
If Devon terminates the Combination Agreement because there has been a breach of
any representation, warranty, covenant or agreement contained in the Combination
Agreement by Northstar, which has been or could reasonably be expected to have a
Material Adverse Effect on Northstar, or if either party terminates because the
required approval of the Northstar Shareholders and Northstar Optionholders has
not been obtained, then Northstar shall pay Devon a cash termination fee of Cdn.
$4,000,000. If Devon terminates the Combination Agreement because of a Northstar
Board Withdrawal or if Northstar terminates pursuant to its determination to
accept a Superior Proposal as described above, then Northstar shall pay Devon a
cash termination fee of Cdn. $23,000,000 at the time of such termination. If
Northstar terminates the Combination Agreement because of a Devon Board
Withdrawal or if Devon shall have approved, or agreed to or announced any
agreement to effect, any Change of Control Transaction, then Devon shall pay
Northstar a cash termination fee of Cdn. $23,000,000 at the time of such
termination. See "-- Termination."
OTHER AGREEMENTS
Affiliates' Agreements. Devon and Northstar have entered into the Devon
Affiliates' Agreements with each of the Devon Affiliates, pursuant to which such
persons have agreed that they will not sell, transfer, encumber or otherwise
dispose of any Devon Common Stock during the period beginning on the date of
execution of the Combination Agreement and ending on the date Devon shall have
publicly released financial results for a period that includes at least 30 days
of combined operations of Devon and Northstar following the Effective Date.
Devon and Northstar have also entered into the Northstar Affiliates'
Agreements with each of the Northstar Affiliates, pursuant to which such persons
have agreed that they will not sell, transfer, encumber or otherwise dispose of
any Northstar Common Shares from the date of execution of the Combination
Agreement until the 45th day preceding the Effective Date except for valid
business purposes, and, subject to certain exceptions, in the 45 day period
preceding the Effective Date and that they will not sell, transfer or encumber
or otherwise dispose of any Exchangeable Shares or Devon Common Stock after the
Effective Date until Devon shall have publicly released financial results for a
period that includes at least 30 days of combined operations of Devon and
Northstar following the Effective Date.
In addition, the Northstar Affiliates have agreed that they will not sell,
pledge or otherwise dispose of any Exchangeable Shares or Devon Common Stock,
respectively, unless: (i) such transaction is permitted pursuant to the
provisions of Rule 145(d) under the Securities Act; (ii) in a transaction that
complies with Rule 903 or Rule 904 of Regulation S under the Securities Act or
is otherwise exempt from registration requirements of the Securities Act; or
(iii) pursuant to an effective registration statement under the Securities Act.
Stockholder Agreements. Stockholders owning 34% of Devon Common Stock as of
October 27, 1998 have agreed to vote all shares of Devon Common Stock over which
they have voting authority in favor of the Combination Agreement and the
Combination and the Certificate Amendment. Northstar Shareholders who
collectively owned 7.5% of the outstanding Northstar Common Shares and Northstar
Common Shares subject to Northstar Options as of October 27, 1998, have agreed
to vote all Northstar voting securities over which they have voting authority in
favor of the Arrangement Resolution.
COURT APPROVAL OF THE ARRANGEMENT AND COMPLETION OF THE COMBINATION
The Arrangement requires approval by the Court. Prior to the mailing of
this Joint Proxy Statement, Northstar obtained the Interim Order providing for
the calling and holding of the Northstar Meeting and other procedural matters. A
copy of the Interim Order is attached hereto as Annex C. The Notice of Petition
for the Final Order appears at the front of this Joint Proxy Statement.
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Subject to the approval of the Arrangement by the Northstar Shareholders
and Northstar Optionholders at the Northstar Meeting, the hearing in respect of
the Final Order is scheduled to take place on the date and at the time set forth
in the Notice of Petition for the Final Order at the Court House, 611-4th
Street, S.W., Calgary, Alberta, Canada. ALL NORTHSTAR SHAREHOLDERS AND NORTHSTAR
OPTIONHOLDERS WHO WISH TO PARTICIPATE OR BE REPRESENTED OR TO PRESENT EVIDENCE
OR ARGUMENTS AT THAT HEARING MUST FILE AND SERVE A NOTICE OF INTENTION TO
APPEAR, AS SET OUT IN THE NOTICE OF PETITION, AND SATISFY ANY OTHER REQUIREMENTS
SPECIFIED THEREIN. At the hearing of the application in respect of the Final
Order, it is anticipated that the Court will consider, among other things, the
fairness of the Arrangement, which will specifically include: (i) the exchange
of Northstar Common Shares for Exchangeable Shares, and (ii) the conversion of
Northstar Options into options to purchase shares of Devon Common Stock. The
Court may approve the Arrangement as proposed or require amendments or refuse to
approve the Arrangement.
The Final Order, if granted, will constitute the basis for an exemption
from the registration requirements of the Securities Act for the issuance of
Exchangeable Shares and the conversion of Northstar Options into options to
purchase shares of Devon Common Stock.
Assuming the Final Order is granted and the other conditions to the
Combination Agreement are satisfied or waived, it is anticipated that the
following will occur substantially simultaneously: (i) Articles of Arrangement
will be filed with the Registrar under the ABCA to give effect to the
Arrangement; (ii) the Support Agreement and the Voting and Exchange Trust
Agreement will be executed and delivered; and (iii) the various other documents
necessary to consummate the transactions contemplated under the Combination
Agreement will be executed and delivered. Subject to the foregoing, it is
presently anticipated that the Effective Date will occur within two or three
days after the requisite shareholder and optionholder approvals on or about
December 10, 1998.
ANTICIPATED ACCOUNTING TREATMENT
The Combination is anticipated to be accounted for using the
pooling-of-interests method of accounting under U.S. GAAP. Under the
pooling-of-interests method of accounting, the assets, liabilities and
shareholders' equity and the operating results of Northstar and Devon for all
periods will be restated to combine the separate accounts of the two companies.
The combined historical amounts will be carried forward by Devon and there will
be no increase in the book value of the assets of either Devon or Northstar in
connection with the Combination.
Devon and Northstar have entered into affiliates' agreements with each
Northstar Affiliate and Devon Affiliate. See "-- Other Agreements -- Affiliates'
Agreements." Such agreements relate to, among other things, the ability of Devon
to account for the Combination as a pooling-of-interests under U.S. GAAP.
BUSINESS COMBINATION COSTS
Devon and Northstar expect to incur non-recurring business combination
costs estimated at $13 million, primarily related to professional and advisory
fees, registration and listing fees and printing costs related to the
Combination.
PROCEDURES FOR EXCHANGE BY NORTHSTAR SHAREHOLDERS AND NORTHSTAR OPTIONHOLDERS
Northstar Shareholders. Enclosed with copies of this Joint Proxy Statement
delivered to the registered holders of Northstar Common Shares is a Northstar
Letter of Transmittal which, when duly completed and returned together with a
certificate for Northstar Common Shares, shall enable each Northstar Shareholder
to exchange such Northstar Common Shares for that number of: (i) Exchangeable
Shares equal to the number of Northstar Common Shares held by such shareholder
multiplied by the Exchange Ratio; or (ii) at the election of the holder in the
Northstar Letter of Transmittal, indirectly for the same number of shares of
Devon Common Stock pursuant to an election under the Exchange Put Right. See
"-- Combination Mechanics and Description of Exchangeable Shares."
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No certificates representing fractional Exchangeable Shares will be issued.
In lieu of fractional Exchangeable Shares, each holder of a Northstar Common
Share who would otherwise be entitled to receive a fraction of an Exchangeable
Share shall be paid by Northstar an amount of cash (rounded to the nearest whole
cent in U.S. dollars) equal to the product of such fraction, multiplied by the
average closing price of the shares of Devon Common Stock on the AMEX for the
ten trading days ended on the last trading date prior to the Effective Date.
Any use of the mails to transmit a certificate for Northstar Common Shares
and a related Northstar Letter of Transmittal is at the risk of the Northstar
Shareholder. If these documents are mailed, it is recommended that registered
mail, with return receipt requested, properly insured, be used.
If the Combination is completed, certificates representing the appropriate
number of Exchangeable Shares or shares of Devon Common Stock issuable to a
former holder of Northstar Common Shares who has complied with the procedures
set out above, together with a U.S. dollar check in the amount, if any, payable
in lieu of fractional Exchangeable Shares or Devon Common Stock will, as soon as
practicable after the later of the Effective Date and the date of receipt of a
certificate for Northstar Common Shares and a related Northstar Letter of
Transmittal, be: (i) forwarded to the holder at the address specified in the
Northstar Letter of Transmittal by first class mail; or (ii) made available at
one of the offices of the Trustee designated for that purpose in the Northstar
Letter of Transmittal for pickup by the holder.
If the Arrangement does not proceed, all certificates representing
Northstar Common Shares transmitted with a related Northstar Letter of
Transmittal will be returned to Northstar Shareholders.
Where a certificate for Northstar Common Shares has been destroyed, lost or
mislaid, the registered holder of that certificate should immediately contact
CIBC Mellon Trust Company, the transfer agent of the Northstar Common Shares,
regarding the issuance of a replacement certificate upon the holder satisfying
such requirements as may be imposed by Northstar in connection with issuance of
the replacement certificate.
Northstar Optionholders. Each outstanding Northstar Option (other than
options held by holders who have validly exercised their rights of dissent) will
be assumed by Devon and will be automatically converted at the Effective Date to
become an option to purchase shares of Devon Common Stock in accordance with the
terms of the Arrangement. Promptly after the Effective Time, Devon will notify
each Northstar Optionholder of such conversion and the particulars thereof.
STOCK EXCHANGE LISTINGS
The TSE has conditionally approved the listing and posting for trading of
the Exchangeable Shares on the Effective Date, subject to compliance with its
usual requirements. The AMEX has conditionally approved, subject to Devon
Stockholder approval, the listing on a when issued basis of the shares of Devon
Common Stock to be issued from time to time in exchange for Exchangeable Shares
and upon future exercise of the Northstar Options.
ELIGIBILITY FOR INVESTMENT IN CANADA
Exchangeable Shares. The Exchangeable Shares, provided they are listed on a
prescribed stock exchange in Canada (which currently includes the TSE): (i) will
not be foreign property under the Canadian Tax Act for trusts governed by
registered pension plans, registered retirement savings plans, registered
retirement income funds and deferred profit sharing plans or for certain other
tax-exempt persons; and (ii) will be qualified investments under the Canadian
Tax Act for trusts governed by registered retirement savings plans, registered
retirement income funds and deferred profit sharing plans.
Devon has indicated that it intends to use its best efforts to cause
Northstar to maintain the listing of the Exchangeable Shares on the TSE or, in
the event that a listing on the TSE is not available, on another recognized
Canadian stock exchange. In certain other circumstances, the Exchangeable Shares
will be qualified investments even if the shares are not listed.
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Voting Rights and Exchange Rights. The Voting Rights and the Exchange
Rights will not be qualified investments and will be foreign property under the
Canadian Tax Act. However, as indicated under "Income Tax Considerations to
Northstar Shareholders and Optionholders -- Canadian Federal Income Tax
Considerations to Northstar Shareholders and Optionholders -- Northstar
Shareholders Resident in Canada", Northstar is of the view that the fair market
value of these rights is nominal.
Devon Common Stock. The shares of Devon Common Stock will be a qualified
investment under the Canadian Tax Act for trusts governed by registered
retirement savings plans, registered retirement income funds and deferred profit
sharing plans provided such shares remain listed on the AMEX or another
prescribed stock exchange. The shares of Devon Common Stock will be foreign
property under the Canadian Tax Act.
REGULATORY MATTERS
Investment Canada Act
Devon has completed all filings required under the Investment Canada Act,
the Canadian statute of general application regulating non-domestic investment
in Canada, and has received the necessary approval required to proceed with the
Arrangement.
Competition Act
The acquisition of Northstar Common Shares by Devon pursuant to the
Arrangement will constitute a transaction (a "notifiable transaction") requiring
notification to the Director of Investigation and Research appointed under the
Competition Act (the "Director") under Part VIII of the Competition Act. A
notifiable transaction may not be completed prior to the expiration or earlier
termination of the applicable waiting period, plus any extensions thereof (the
"waiting period"), after notice of such transaction in prescribed form has been
delivered to the Director. The waiting period may be seven or 21 days from the
time information is provided to the Director, depending upon the type of
information provided to the Director, or until such earlier date on which the
Director notifies Devon that the Director does not, at that time, intend to make
an application to the Competition Tribunal (which is a special purpose federal
tribunal) in respect of the proposed transaction. If the Competition Tribunal
determines on application by the Director that the "notifiable transaction"
prevents or lessens, or is likely to prevent or lessen, competition
substantially, it may enjoin a proposed merger, or order the dissolution of a
completed merger if the Director makes application within three years of
completion of the merger.
Devon has made a short-form pre-merger notification filing with the
Director including the information prescribed by Section 121 of the Competition
Act. The waiting period for such a notification has expired.
Alberta Energy and Utilities Board
The Public Utilities Board Act (Alberta) provides that a union between
owners of a public utility is subject to the consent of the Alberta Energy and
Utilities Board ("AEUB") and has no effect until the order authorizing the union
is published in The Alberta Gazette. A similar provision applies under the Gas
Utilities Act (Alberta) to a union between the owners of a gas utility. Each of
Devon and Northstar may be an owner of a public utility and an owner of a gas
utility for the purposes of these provisions. Each of the Public Utilities Board
Act (Alberta) and the Gas Utilities Act (Alberta), however, provides that the
AEUB may make an order declaring that a provision of the relevant Act does not
apply to a specific owner of a public utility or of a gas utility. Devon intends
to apply to the AEUB for orders under each of the Public Utilities Board Act
(Alberta) and the Gas Utilities Act (Alberta) that the relevant provisions of
those Acts do not apply to Devon or Northstar for the purposes of the
acquisition of Northstar Common Shares by Devon pursuant to the Arrangement. In
the past, such exemption orders have been granted routinely where the utilities
that may be subject to the provisions described above are utilities not offering
service to the general public. There are no prescribed time periods applicable
to the processing of applications for such exemption orders but typically the
processing has been completed within a few days of the filing of the relevant
application. Devon intends to apply for such orders shortly after the date of
the mailing of this Joint Proxy Statement to its stockholders.
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Other
Devon and Northstar are not aware of any other government or regulatory
approvals required for consummation of the Combination, other than compliance
with applicable securities laws of various jurisdictions and the rulings or
orders to be obtained from certain provincial securities regulatory authorities
in Canada. See "-- Resale of Exchangeable Shares and Devon Common Stock Received
in the Combination -- Canada."
RESALE OF EXCHANGEABLE SHARES AND DEVON COMMON STOCK RECEIVED IN THE COMBINATION
United States. The issuance of Exchangeable Shares to Northstar
Shareholders will not be registered under the Securities Act. Such shares will
be issued in reliance upon the exemption available pursuant to Section 3(a)(10)
of the Securities Act. Section 3(a)(10) exempts securities issued in exchange
for one or more outstanding securities from the general requirement of
registration where the terms and conditions of the issuance and exchange of such
securities have been approved by any court of competent jurisdiction, after a
hearing upon the fairness of the terms and conditions of the issuance and
exchange at which all persons to whom such securities will be issued have the
right to appear. The Court is authorized to conduct a hearing to determine the
fairness of the terms and conditions of the Arrangement, including the proposed
issuance of securities in exchange for other outstanding securities. Subject to
the approval of the Arrangement by the Northstar Shareholders and Northstar
Optionholders, a hearing on the fairness of the Arrangement will be held on the
date specified in the Notice of Petition for the Final Order. See "-- Court
Approval of the Arrangement and Completion of the Combination." Devon has
registered under the Securities Act the shares of Devon Common Stock to be
issued upon exchange of the Exchangeable Shares and Devon's obligations relating
to the Exchangeable Shares with the SEC on a Registration Statement on Form S-3.
The Exchangeable Shares and the shares of Devon Common Stock issued upon
exchange of the Exchangeable Shares will be freely transferable under U.S.
federal securities laws, except that Exchangeable Shares and the shares of Devon
Common Stock issued upon exchange of the Exchangeable Shares received by persons
who are deemed to be "affiliates" (as such term is defined under the Securities
Act) of Northstar prior to the Combination may be resold by them only in
transactions permitted by the resale provisions of: (i) Rule 903 or 904 of
Regulation S under the Securities Act, if available; (ii) Rule 145(d)(1), (2),
or (3) promulgated under the Securities Act; or (iii) as otherwise permitted
under the Securities Act. Rule 145(d)(1) generally provides that "Affiliates" of
either Northstar or Devon may sell securities of Devon received in the
Arrangement if such sale is effected pursuant to an effective registration
statement or pursuant to the volume, current public information and manner of
sale limitations of Rule 144 under the Securities Act. These limitations
generally require that any sales made by an affiliate in any three-month period
shall not exceed the greater of 1% of the outstanding shares of the securities
being sold or the average weekly trading volume over the four calendar weeks
preceding the placement of the sell order and that such sales be made in
unsolicited, open market "brokers transactions." Rules 145(d)(2) and (3)
generally provide that the foregoing limitations lapse for non-affiliates of
Devon after a period of one or two years, respectively, depending upon whether
certain currently available information continues to be available with respect
to Devon. Under Rule 904, persons who are not "affiliates" of Devon (or who are
affiliates of Devon solely by virtue of holding a position as an officer or
director of Devon) may sell Exchangeable Shares if no "directed selling efforts"
(as defined in Rule 902 of Regulation S) are made by the seller or any of its
affiliates or any person acting on their behalf, no offer is made to a person in
the United States, and either: (i) at the time the buy order is originated, the
buyer is outside the United States, or the seller and any person acting on
behalf of the seller reasonably believes the buyer is outside the United States;
or (ii) the transaction is executed in, on or through the facility of the TSE
and neither the seller nor any person acting on behalf of the seller knows that
the transaction has been pre-arranged with a buyer in the United States. In the
case of sales by a person who is an officer or director of Devon and is an
affiliate of Devon solely by virtue of holding that position, no selling
concession, fee or other remuneration may be paid in connection with the offer
or sale other than the usual and customary broker's commission that would be
received by a person executing the transaction as agent. Additional conditions
apply to resales by persons who are affiliates of Devon other than by virtue of
holding a position as an officer or director of Devon.
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<PAGE> 117
Persons who may be deemed to be affiliates of an issuer generally include
individuals or entities that control, are controlled by, or are under common
control with, such issuer and may include certain officers and directors of such
issuer as well as principal shareholders of such issuer.
Devon intends to register under the Securities Act on Form S-8 the shares
of Devon Common Stock issuable upon exercise of Northstar Options that are
assumed by Devon. Devon Common Stock issuable upon exercise of the Northstar
Options may be sold without restrictions in the United States by Northstar
Optionholders who are not affiliates of Devon. Northstar Optionholders who are
affiliates of Devon must comply with the volume, current public information and
manner of sale limitations of Rule 144.
Northstar and Devon have entered into affiliates' agreements with each of
the Northstar Affiliates restricting the transfer of the Exchangeable Shares and
the underlying shares of Devon Common Stock, and shares of Devon Common Stock
issuable upon the exercise of Northstar Options assumed by Devon, for the period
required by the requirements for pooling-of-interests accounting treatment (see
"-- Anticipated Accounting Treatment") and restricting the sale, pledge or other
disposal of Exchangeable Shares and Devon Common Stock. See "-- Other
Agreements -- Affiliates' Agreements."
Canada. Devon and Northstar have received rulings or orders of certain
provincial securities regulatory authorities in Canada, providing exemptions
from the registration and prospectus requirements (and the rights and
protections otherwise afforded thereunder): (i) to permit the issuance of the
Exchangeable Shares to Northstar Shareholders; (ii) to permit the issuance of
shares of Devon Common Stock to holders of Exchangeable Shares; (iii) amendment
of the Northstar Options to permit the issuance of shares of Devon Common Stock;
and (iv) to permit resale of the Exchangeable Shares, shares of Devon Common
Stock issued to holders of Exchangeable Shares or shares of Devon Common Stock
issuable on exercise of the Northstar Options, as the case may be, in such
provinces without restriction by a shareholder other than a "control person,"
provided that no unusual effort is made to prepare the market for any such
resale or to create a demand for the securities which are the subject of any
such resale and no extraordinary commission or consideration is paid in respect
thereof. Applicable Canadian securities legislation provides a rebuttable
presumption that a person or company is a control person in relation to an
issuer where the person or company alone or in combination with others holds
more than 20% of the outstanding voting securities of the issuer. In the case of
the resale of shares of Devon Common Stock by Canadian Northstar Shareholders or
Northstar Optionholders, such sales must be made through the facilities of the
AMEX in accordance with the rules of the AMEX (or through the facilities of
another United States stock exchange on which the shares of Devon Common Stock
are listed). Northstar has also received certain exemptions from statutory
financial, insider reporting and other reporting requirements in such provinces
on the condition that Devon file with the securities regulatory authorities of
such provinces copies of certain of its reports filed with the SEC and that
holders of Exchangeable Shares receive certain materials that are sent to
holders of Devon Common Stock.
111
<PAGE> 118
BUSINESS OF DEVON
Devon is an independent energy company engaged primarily in oil and gas
exploration, development and production, and in the acquisition of producing
properties. Through its predecessors, Devon began operations in 1971 as a
privately-held company. In 1988, the shares of Devon Common Stock began trading
publicly on the AMEX under the symbol "DVN." The principal and administrative
offices of Devon are located at 20 North Broadway, Suite 1500, Oklahoma City,
Oklahoma 73102-8260 (telephone (405) 235-3611).
Devon owns interests in 1,700 oil and gas properties in five core operating
areas: the Permian Basin in southeast New Mexico and western Texas; the San Juan
Basin in northwestern New Mexico; the Rocky Mountain region in Wyoming; the
Mid-Continent region in Oklahoma and the Texas Panhandle; and the Western Canada
Sedimentary Basin in Alberta, Canada. As of December 31, 1997, Devon had
approximately 380 full time employees, 220 of whom were employed in the
headquarters in Oklahoma City, 125 of whom were field personnel in the U.S., 20
of whom were employed in the Calgary office and 15 of whom were field personnel
in Canada.
A description of the business of Devon is included in Devon's Form 10-K for
the year ended December 31, 1997, a copy of which is included herewith.
BUSINESS OF NORTHSTAR
Northstar was incorporated under the laws of the Province of Alberta on
November 3, 1981 and was continued under the ABCA in July 1985. Northstar
commenced operations in 1982 and carried on business under the name "Gane Energy
Corporation Ltd." until June 1986, at which time its name was changed to
"Northstar Energy Corporation". In August 1982, the Northstar Common Shares
commenced trading on the TSE and the ASE and in April 1997, the Northstar Common
Shares were listed on the ME. The head and principal office of Northstar is
located at 3000, 400-3rd Avenue S.W., Calgary, Alberta T2P 4H2 (telephone (403)
213-8100).
Northstar is, directly and indirectly through Northstar Energy (a general
partnership in which Northstar and its wholly-owned subsidiary are partners),
actively engaged in the business of petroleum and natural gas exploration,
development, production and marketing. Northstar's oil and gas operations are
concentrated primarily within the Province of Alberta, Canada. As at December
31, 1997, Northstar had approximately 450 employees, 215 of whom were head
office employees and 235 of whom were field personnel.
A description of the business of Northstar is included in Northstar's
Revised Annual Information Form for the year ended December 31, 1997, a copy of
which is included herewith.
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<PAGE> 119
THE COMPANY AFTER THE COMBINATION
GENERAL
Upon completion of the Combination, Devon will be an evenly balanced North
American oil and gas producer with 54 percent of its reserves in the U.S. and 46
percent in Canada. The combined company (sometimes referred to herein as the
"Company") expects to have total reserves of approximately 1.2 Tcf of gas and
117 MMBbls of oil and natural gas liquids. With this Combination, Devon believes
it will rank in the top 15 of all U.S.-based, publicly-held, independent
producers in terms of total proved reserves and, in terms of U.S.-only
production, among the top 20 public independents. In Canada, Devon believes it
will rank among the top 20 in Canada-only oil and gas production.
Immediately following the Combination, Devon will have approximately $325
million in long-term debt. Consequently, it expects to have substantial unused
borrowing capacity. Devon also expects that the Company will have more financial
flexibility to take advantage of opportunities for mergers, acquisitions,
exploration or other growth opportunities than either Devon or Northstar would
have had separately.
The Company will have the combined management teams of both Devon and
Northstar. J. Larry Nichols, current President and CEO of Devon, will continue
to serve as President and CEO of Devon. Mr. Nichols and the remainder of Devon's
executive staff will continue in their present capacities as the senior
executive staff of Devon. John A. Hagg, current President and CEO of Northstar,
and its executive staff will lead the Canadian operations.
Devon's primary objectives will continue to be to build reserves,
production, cash flow and earnings per share by: (i) acquiring oil and gas
properties; (ii) exploring for new oil and gas reserves and (iii) optimizing
production from existing oil and gas properties. Management believes that by:
(i) keeping debt levels low; (ii) concentrating properties in core areas to
achieve economies of scale; (iii) acquiring and developing high profit margin
properties; (iv) continually disposing of marginal and non-strategic properties;
and (v) balancing reserves between oil and gas, Devon's profitability will be
maximized.
RESERVES AND LEASEHOLD
In most cases throughout this Joint Proxy Statement, data for Devon and
Northstar are presented according to U.S. presentation conventions. However, the
reader should be aware that the conventions regarding the presentation of
certain revenue, royalty, reserve and production data are different in the
United States than in Canada. In Canada, oil and gas revenues, oil and gas
reserves and oil and gas production generally are presented "gross" (i.e.,
before deducting that portion attributable to royalties). In the U.S., virtually
all such data are presented after deducting that portion attributable to
royalties. Also, the Canadian convention for converting gas production to Boe
employs a conversion ratio of 10 Mcf per Boe, whereas in the U.S., the gas:oil
conversion ratio convention is 6 Mcf per Boe. Comparison of data previously
distributed or filed by Northstar using Canadian conventions to the data
presented in this Joint Proxy Statement for the Company should be made in light
of the differences in presentation conventions. The foregoing is not intended as
a complete discussion of the differences between U.S. and Canadian conventions.
Combined pro forma proved reserve estimates as of December 31, 1997, based
on U.S. reserve estimate conventions and year-end 1997 oil and gas prices held
constant, were as follows:
<TABLE>
<CAPTION>
UNITED STATES CANADA TOTAL
------------- ------ -----
<S> <C> <C> <C>
Oil (MMBbls)............................................. 61 39 100
Gas (Bcf)................................................ 568 598 1,166
NGLs (MMBbls)............................................ 12 5 17
Total (MMBoe)............................................ 168 144 312
</TABLE>
Approximately 87% of these reserves were classified as proved developed.
See "Risk Factors -- Uncertainty in Estimated Reserves and Future Net Revenues."
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<PAGE> 120
Proved developed, proved undeveloped and total proved reserves for Devon,
Northstar and Devon and Northstar combined, as of December 31, 1997, based on
U.S. reserve estimate conventions and year-end 1997 oil and gas prices held
constant, were as follows.
<TABLE>
<CAPTION>
DEVON NORTHSTAR COMBINED
----- --------- --------
<S> <C> <C> <C>
Proved developed reserves:
Oil (MMBbls).............................................. 60 31 91
Gas (Bcf)................................................. 506 494 1,000
NGLs (MMBbls)............................................. 12 4 16
Total (MMBoe)............................................. 157 117 274
Proved undeveloped reserves:
Oil (MMBbls).............................................. 8 1 9
Gas (Bcf)................................................. 110 56 166
NGLs (MMBbls)............................................. 1 -- 1
Total (MMBoe)............................................. 27 11 38
Total proved reserves:
Oil (MMBbls).............................................. 68 32 100
Gas (Bcf)................................................. 616 550 1,166
NGLs (MMBbls)............................................. 13 4 17
Total (MMBoe)............................................. 184 128 312
</TABLE>
The total proved reserve estimates of Devon and Northstar shown above were
calculated using oil and gas prices at December 31, 1997, held constant over the
economic life of the properties. From December 31, 1997 to August 31, 1998, the
price of West Texas Intermediate crude oil decreased approximately 33% and the
Texas Gulf Coast gas price decreased approximately 21%. If the total proved
reserve estimates reported by Devon and Northstar above as of December 31, 1997,
were calculated using oil and gas prices as of August 31, 1998, held constant
over the economic life of the properties, the aggregate reserve estimates would
have decreased by approximately 4% from the total proved reserves shown above.
The following tables depict the gross and net oil and gas wells of Devon,
Northstar, and Devon and Northstar combined, as of December 31, 1997:
<TABLE>
<CAPTION>
DEVON NORTHSTAR COMBINED
----- --------- --------
<S> <C> <C> <C>
Gross oil wells(1):
United States............................................. 8,427 -- 8,427
Canada.................................................... 692 1,522 2,214
----- ----- ------
Total..................................................... 9,119 1,522 10,641
===== ===== ======
Net oil wells(2):
United States............................................. 1,230 -- 1,230
Canada.................................................... 117 541 658
----- ----- ------
Total..................................................... 1,347 541 1,888
===== ===== ======
Gross gas wells(1):
United States............................................. 2,852 -- 2,852
Canada.................................................... 234 797 1,031
----- ----- ------
Total..................................................... 3,086 797 3,883
===== ===== ======
Net gas wells(2):
United States............................................. 703 -- 703
Canada.................................................... 61 403 464
----- ----- ------
Total..................................................... 764 403 1,167
===== ===== ======
</TABLE>
- ---------------
(1) Gross wells are the total number of wells in which Devon or Northstar own a
working interest.
(2) Net refers to gross wells multiplied by Devon's or Northstar's fractional
working interests therein.
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<PAGE> 121
The following tables set forth the gross and net developed and undeveloped
oil and gas lease and mineral acreage as of December 31, 1997, for Devon,
Northstar and for Devon and Northstar combined.
<TABLE>
<CAPTION>
DEVON NORTHSTAR COMBINED
----- --------- --------
(THOUSANDS)
<S> <C> <C> <C>
Gross developed acreage(1):
United States............................................. 1,573 -- 1,573
Canada.................................................... 187 723 910
----- ----- -----
Total..................................................... 1,760 723 2,483
===== ===== =====
Net developed acreage(2):
United States............................................. 481 -- 481
Canada.................................................... 76 396 472
----- ----- -----
Total..................................................... 557 396 953
===== ===== =====
Gross undeveloped acreage(1):
United States............................................. 1,286 -- 1,286
Canada.................................................... 114 2,186 2,300
----- ----- -----
Total..................................................... 1,400 2,186 3,586
===== ===== =====
Net undeveloped acreage(2):
United States............................................. 418 -- 418
Canada.................................................... 76 1,585 1,661
----- ----- -----
Total..................................................... 494 1,585 2,079
===== ===== =====
</TABLE>
- ---------------
(1) Gross acres are the total number of acres in which Devon or Northstar owns a
working interest.
(2) Net refers to gross acres multiplied by Devon's or Northstar's fractional
working interests therein.
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<PAGE> 122
CORE OPERATING AREAS IN THE UNITED STATES
Devon's United States property base will be unchanged and continue to be
concentrated in four core areas: the Permian Basin in southeastern New Mexico
and western Texas; the San Juan Basin in northwestern New Mexico; the Rocky
Mountain region in Wyoming; and the Mid-continent region in Oklahoma and the
Texas Panhandle.
LOGO
Graphic: Two Maps
Map 1 is a small map of the U.S. and Canada that outlines the lower 48 states,
10 provinces and two territories. The states in which Devon has properties are
highlighted and named (specifically Montana, North Dakota, Idaho, Wyoming, South
Dakota, Nebraska, Utah, Colorado, Kansas, Arizona, New Mexico, Oklahoma and
Texas).
Map 2 is a larger map of only the highlighted portions of Map 1. This map shows
the outlines of the states and also shows the general locations of Devon's core
operating areas in the U.S. The core areas shown are the Rocky Mountain Region,
the San Juan Basin, the Mid-Continent and the Permian Basin.
Permian Basin Properties
The Permian Basin is a prolific oil and gas producing province located in
western Texas and southeastern New Mexico. The area encompasses approximately
66,000 square miles and contains more than 500 major oil and gas fields. Oil and
gas leases within the Permian Basin are difficult to obtain as much of the
undeveloped acreage with development potential is "held by production," i.e.,
covered by long-term leases which do not expire as long as production from
nearby wells is commercially viable. Since 1987, Devon has made four significant
acquisitions of properties in the Permian Basin. These acquisitions have enabled
Devon to obtain undeveloped acreage with development potential in areas in which
leasehold positions are difficult to establish. This leasehold position
continues to provide Devon with exploration and development opportunities. Devon
also has initiated enhanced oil recovery projects to further expand reserves.
Grayburg-Jackson Field. Devon acquired the Grayburg-Jackson Field in 1994.
The property consists of approximately 8,500 acres located in the southeastern
New Mexico portion of the Permian Basin. The field produces from an 800-foot
thick interval of the Grayburg and San Andres Formations at depths between 3,000
and 4,000 feet. Post-Combination, the Grayburg-Jackson Field will represent 19%
of Devon's proved oil reserves. It will be Devon's largest oil property.
Production in this field was established in the 1930's, with most of the
current producing wells drilled since 1970. When Devon acquired this property in
1994, drilling by previous owners had developed the property on an average
spacing of over 40 acres per well. Additional oil reserves were recovered from
similar properties in the immediate vicinity by infill drilling to 20 acres per
well spacing and subsequent waterflooding.
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<PAGE> 123
Based upon analogy to these properties, Devon initiated a $75 million capital
development project in 1994. The project included drilling approximately 185
infill wells, converting selected producing wells to water injection wells and
optimizing the existing waterflood. Devon substantially completed the
infill-drilling phase of the project in 1996. The majority of the field was in
the initial phases of water injection by mid-1997.
At year-end 1997, production from the Grayburg-Jackson Field averaged
approximately 3,000 (or 2,800 net) Boe per day. Devon anticipates that continued
water injection and completion of the waterflood facilities will continue to
enhance oil and gas recoveries.
Ozona Field. The Ozona Field encompasses more than 200,000 acres in
Crockett County, Texas, situated 120 miles southeast of Midland, Texas. The
field produces gas primarily from the Canyon and Strawn Formations at depths
ranging from approximately 6,000 to 9,000 feet. The field has been developed on
80-acre spacing, with portions now being infill drilled to 40-acre spacing. At
year-end 1997, the Ozona Field was producing 31 MMcf of gas per day and
approximately 800 Bbls of oil and NGLs per day, net to Devon's interest.
Post-Combination, the field will represent approximately 4% of Devon's total gas
reserves.
San Juan Basin Properties
Devon's single largest natural gas reserve position relates to its
interests in two federal units in the northwest New Mexico portion of the San
Juan Basin: the 33,000 acre NEBU, in Rio Arriba and San Juan Counties; and the
22,400 acre 32-9 Unit in San Juan County. The San Juan Basin, a densely drilled
area covering 3,700 square miles in central and northwestern New Mexico, has
been historically considered the second largest gas-producing basin in the
United States. Prior to 1990, the Basin's gas production primarily came from
conventional sandstone formations at a depth of about 5,500 feet. However, in
the early 1980's, development of the shallower Fruitland coal formation began.
Coal seam gas production has increased so significantly that the San Juan Basin
could be considered the largest gas producing basin in the U.S. Production from
the coal seams constitutes almost all of Devon's reserves in these two units.
Substantially all of Devon's interests in both of these units are a part of
a transaction into which Devon entered effective January 1, 1995. For a detailed
discussion of this transaction, see "-- San Juan Basin Transaction" below and
note 3 to Devon's consolidated financial statements in Devon's Form 10-K for the
year ended December 31, 1998, a copy of which is included herewith.
Northeast Blanco Unit. Post-Combination some 13%, or 148.7 Bcf of Devon's
total gas reserves will be attributable to this field. Of this amount,
approximately 97%, or 144.5 Bcf, are associated with the Fruitland coal
formation. The potential for gas production from coal seams varies depending
upon the thickness of the coal formation, the type of coal in place, the depth
at which it is found and other factors. NEBU is located in the central part of
the San Juan Basin where each of the factors is at or near its optimum. NEBU is
operated by Devon. Devon initially began developing its coal seam interest
during 1988, eventually drilling 102 wells.
In the near term, Devon is implementing various projects that have
increased and may continue to increase production and recoverable reserves. The
first of these projects, called "line looping," involves laying additional
gathering lines to decrease operating pressures. This project was begun in 1996
and was substantially completed in October, 1997. Another project involves the
installation of additional compressors at various points in the gathering system
and at central delivery points associated with NEBU. This project was begun in
1997 and will continue in 1998 and beyond. Additional projects to improve
production through work on individual wells are currently underway. Longer term,
Devon believes that additional wells will be drilled which could extend
production from NEBU.
Initial results from the line looping and compression projects appear
favorable. Total daily production from NEBU has increased from an average of 187
MMcf of gas per day (gross) in June 1996 to an average of 225 (or 42 net) MMcf
of gas per day in June 1998. Devon anticipates that the installation of
additional compression and facilities could increase production from NEBU
another 10 MMcf to 20 MMcf of gas per day (gross). As part of the San Juan Basin
Transaction (discussed in more detail below), a third party will pay 100% of
Devon's share of the capital necessary to enhance production from the existing
NEBU wells. Devon is
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<PAGE> 124
entitled to retain 75% of any reserves in excess of those estimated to be in
place at the time of the transaction which are developed as a result of such
capital expenditures. See "-- San Juan Basin Transaction" below.
32-9 Unit. Post-Combination, some 7%, or 80.5 Bcf, of Devon's total gas
reserves will be attributable to this field. The 32-9 Unit is located
approximately eight miles northwest of NEBU. Geologically and operationally this
property is very similar to NEBU; the coal seams at the 32-9 Unit are about the
same thickness as at NEBU, the type of coal and the depth at which it is found
are similar and the gas content of the coal is estimated to be approximately the
same. However, the 32-9 Unit is located in an area where the coal does not
appear to be as permeable as it is at NEBU. Thus, the 32-9 Unit wells tend to
produce at lower rates but should produce for a longer period of time than the
NEBU wells. Currently, the 32-9 Unit produces approximately 72.3 (or 15.4 net)
MMcf of gas per day. Longer term, Devon believes that additional wells will be
drilled which could improve production. This unit is also being evaluated for
possible mechanical improvements similar to those being implemented at NEBU.
San Juan Basin Transaction. Effective January 1, 1995, Devon and an
unrelated company entered into a transaction covering substantially all of
Devon's San Juan Basin coal seam properties. The effect of the transaction is
that the price Devon receives for its coal seam gas production will range
between $0.40 and $0.60 per Mcf (subject to adjustment for inflation) higher
than the price the Company would otherwise receive during the period from 1995
through the year 2002.
Rocky Mountain Properties
The Rocky Mountain region includes oil and gas producing basins, which are
grouped together because of their geographic location rather than their
geological characteristics. The area generally encompasses all or portions of
the states of Colorado, Montana, North Dakota, Utah and Wyoming. Devon's Rocky
Mountain properties are primarily located in the Big Horn and Powder River
Basins in northern and central Wyoming.
House Creek Field. The House Creek Field is located in Campbell County,
Wyoming within the Powder River Basin. Devon acquired its original interest in
the field at year-end 1996. In 1997, Devon purchased additional interests. The
field, which produces oil from the Sussex Sandstone reservoir at depths of 8,200
feet, covers an area thirty miles long and two miles wide. The Field is divided
into two production units. The southern two-thirds of the field, designated as
the House Creek Sussex Unit, is operated by Devon with a 45.4% working interest.
Devon has a 41.6% net revenue interest in this Unit. A 12-well infill drilling
program was initiated late in 1997. Based on the success of that program, an
additional 60 to 80 wells could be drilled in 1998, effectively reducing well
spacing from 160 to 80 acres per well. The northern third of the field,
designated as the House Creek North Sussex Unit, is operated by a third party.
Devon has a 26.5% working interest and a 22.1% net revenue interest in the North
Unit. Like the southern Unit, infill drilling is also underway in the North
Unit. Both Units are currently under waterflood.
Approximately 12%, or 11.6 Bbls, of Devon's total oil reserves would have
been attributable to the House Creek Field, assuming the Combination had been
completed on December 31, 1997. With a daily production rate of 4,100 (1,650
net) Bbls of oil per day, the Field would account for approximately 4% of
Devon's daily oil production post-Combination.
Powder River Coal Seam Gas. As of December 31, 1997, a very small amount of
Devon's reserves were attributable to coal seam gas in the Powder River Basin.
However, in 1998, Devon has undertaken a series of coal seam gas projects in the
area. During the first nine months of 1998, Devon has purchased certain
producing and non-producing coal seam gas wells, purchased additional
underdeveloped leasehold in the area and announced its intention to participate
in the construction of a gas gathering system and related facilities in the
Powder River Basin. These activities have the potential to materially alter
Devon's gas reserves and capital expenditures in the future.
Over the last several years, industry has discovered that certain coal
seams, usually found between 300 feet and 1,000 feet deep, may be capable of gas
production in commercial quantities. To date, some 500 coal seam gas wells have
been drilled throughout the basin. Typical well costs have been approximately
$65,000 to $75,000 per well. Gas reserves could range as high as 300 MMcf to 500
MMcf per well. The wells appear to be
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<PAGE> 125
capable of producing, on average, 100 Mcf/d per well after "dewatering."
However, coal seam gas development in the Powder River Basin is in its infancy
and substantial risks exist. These include, but are not limited to, geologic
risk, ultimate reservoir performance, lack of an acceptable market for the gas,
service and supply limitations, regulatory risks, and ownership risk
attributable to a recent Tenth Circuit Court of Appeals decision.
To date, Devon has purchased interests in 44 producing and 76 non-producing
coal seam gas wells in the area. The non-producing wells are currently awaiting
connection to a gas pipeline to begin production. The producing wells currently
yield 3 MMcf/d to 4 MMcf/d net to Devon. Devon now owns undeveloped leasehold
covering coal seam gas rights of approximately 162,000 net acres. Devon could
possibly drill as many as 1,200 to 1,500 wells on this leasehold over the next
several years. (Such drilling plans presume acceptable economic returns for
Devon's early test results.) Devon recently announced its intention to
participate in the construction of a 24" diameter, 126-mile gas gathering system
in the area along with related facilities. This system would have a total gross
capacity of 450 MMcf/d. Devon's capital expenditures for this system could be as
high as $50 million to $60 million during the next 12 months.
With this combination of projects, Devon's total capital expenditures in
this area could reach $100 million to $300 million over the next several years.
Devon's gas reserve potential could range as high as 500 billion to 600 Bcf.
However, by year-end 1998, Devon expects to record coal seam gas reserves in the
Powder River Basin of only 50 Bcf to 60 Bcf of gas. Future reserve potential
will depend upon additional expenditures and success.
CORE OPERATING AREAS IN CANADA
Post-Combination, the Company's Canadian property base, which will be
operated by and in the name of Northstar, will be concentrated in six major
areas: the North region in northern Alberta; the Foothills region in
southwestern Alberta and eastern British Columbia; the Northwest region in
northwestern Alberta and northeastern British Columbia; the West Central region
in west central Alberta; the South region in southern Alberta; and the East
Central region in east central Alberta and southern Saskatchewan.
LOGO
[Graphic: Two Maps]
Map 1 is a small map of the U.S. and Canada that outlines the lower 48 states,
10 provinces and two territories. The provinces in which Northstar has
properties are highlighted and named (specifically British Columbia, Alberta and
Saskatchewan).
Map 2 is a larger map of only the highlighted portions of Map 1. This map shows
the outlines of the provinces and also shows the outlines of Northstar's core
operating areas in Canada. The core areas shown are the Northwest, North, East
Central, South, West Central and Foothills regions.
119
<PAGE> 126
North Region Properties
The North region includes several natural gas properties, highlighted by
the multi-pool Smoky Bear trend and the Hangingstone property. The North region
is characterized by shallow Wabiskaw and Wabamum gas-bearing production with
lower risk exploration and development targets. Northstar has established a
strong position in this area with an undeveloped land base of 833,000 net acres
and control of 11 production facilities with a combined gas processing capacity
of 260 MMcf per day. During 1997, Northstar drilled 112 wells in this area. The
wells were equally split between exploration and development. This program
achieved natural gas production growth of over 30 MMcf per day.
It is expected that the Company will drill approximately 90 wells in the
Smoky Bear area and 30 wells in the Hangingstone region during 1998. The wells
should be balanced between exploration and development drilling. Approximately
20% growth in well production capability is expected, with the objective of more
fully optimizing plant processing capability.
A number of other possible producing horizons exist along this trend which
are enhanced in terms of risk and reward when combined with the shallow gas
presence. These opportunities include the shallow Wabiskaw heavy oil zone, north
along the trend from the Pelican Lake/Brittnell fields, and the deeper Keg
River, Granite Wash and Slave Point oil formations. The potential scope and
economics of heavy oil development in the region are not determinable at this
time.
Foothills Region Properties
The two geographic areas of southeast British Columbia/southwest Alberta
and northeast British Columbia, linked by the Rocky Mountains, will account for
160,000 net acres of the Company's undeveloped land and give exposure to
approximately 648,000 gross acres of additional joint venture lands. In
addition, the Company will have a large seismic data base. The Company will own
and operate the Coleman sour gas plant and certain pipelines and other
infrastructure in the area. Exploration in the Foothills is typically oriented
toward long-life natural gas reserves. Though potential prospects sizes range
from 200 to 1,000 Bcf, the risks and expenditures for this type of exploration
are high.
In addition to the exploration lands just described, the Company will have
developed, producing properties in the southern Alberta Foothills. In 1997, net
production from this area averaged 13 MMcf/d. Most of this production was
attributable to the Coleman area.
Northwest and West Central Region Properties
The Company expects to continue exploration in the Northwest region,
targeting the Slave Point and Bluesky formations. Drilling in the West Central
region will focus on liquids-rich natural gas.
Northwest. The Company will have an average 75 percent working interest in
the Northwest region, including 179,000 acres of net undeveloped land. During
1997, Northstar upgraded the 60 percent-owned and operated Hamburg gas facility.
This enhancement will help support its expanding gas production in the region.
Also in 1997, Northstar focused on developing the shallow Bluesky horizon at
Chinchaga where two new gas wells were drilled and six others tied-in and placed
on production. The Company wholly-owns and operates a natural gas plant at
Chinchaga, which provides gas processing for third party customers. This area,
in conjunction with exploration in the West Central region, is targeted to be a
growth area for the Company in Canada, complementing the higher-risk Foothills
and lower-risk Smokey Bear shallow gas programs.
West Central. The Company expects to focus significant efforts on the
liquids-rich natural gas fields in the West Central region. This area consists
of multi-zone oil and gas properties at Gilby, Gull Lake and Leduc. In 1997,
Northstar discovered a new pool at Leduc, extended another pool in the region,
assumed operatorship at Lanaway and drilled a successful gas well at Gilby.
These activities have resulted in natural gas production reaching an average of
30 MMcf per day during 1997, and crude oil and natural gas liquids production
averaging 4,200 Bbls/d. Coupled with the Devon properties in central Alberta,
this region will be the Company's largest operating area in Canada. Plans are in
place to further exploit the Gilby oil field
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through a vertical and horizontal well drilling program. The Company expects to
unitize two oil fields in 1998 and increase production with additional drilling
and implementation of secondary recovery projects.
With the Combination, production from these areas in 1997 would have
averaged 8.6 net MBbls of oil and NGLs per day. Gas production would have
averaged 79 net MMcf/d. Total undeveloped leasehold as of December 31, 1997,
would have been 431,000 net acres.
South and East Central Regions
The South region is a mature area, producing a mix of medium quality crude
oil and natural gas. The East Central region is almost exclusively an
oil-producing region.
South. Average daily production was 5,500 Bbls of oil and liquids plus 18
MMcf of natural gas in 1997. As of December 31, 1997, the undeveloped land base
was 160,000 net acres. In 1997, a new oil pool discovery was established on the
Herronton field and two new gas wells were brought onstream. These wells
increased production by over two MMcf/d. At Carmangay, two new gas wells also
added daily volumes of over two MMcf. Also in 1997, the Long Coulee property
experienced a rise in oil production following a successful waterflood and
infill drilling program, while another six infill wells were drilled on the
Retlaw field.
The Company will continue to maximize its oil and liquids and natural gas
reserves at Turin and Long Coulee that are found in medium-depth, multi-zone
horizons. The capacity of the Long Coulee oil battery is expected to be
expanded, the waterflood program will be pursued further, and a development
drilling program will be continued. A waterflood project and development
drilling program are planned at Carmangay. A drilling program at Herronton,
which includes three exploration and six development wells, will be pursued
during 1998.
East Central. The East Central region delivered average crude oil volumes
of 6,100 Bbls/d in 1997. The primary properties in the region are the David,
Bellshill and Halkirk fields, which account for the majority of oil production.
During 1997, Northstar undertook a 25-well development drilling program in
the David field, while at nearby Bellshill it completed a horizontal well
project to optimize production from that property. Across the border in Wilmar,
Saskatchewan, Northstar completed three stratigraphic tests in additional to
nine horizontal wells.
During 1998, the Company intends to concentrate both on further drilling
projects and developing the necessary infrastructure to process crude oil. An
oil battery installation program will proceed in the Wilmar area, adding
expanded processing capacity to help increase production from the field. Further
development and exploration drilling are planned for the Wilmar and Halkirk
areas.
DIRECTORS AND EXECUTIVE OFFICERS
Set forth below is certain information regarding each of the persons who
are expected to serve as directors and executive officers of Devon after
consummation of the Combination. The Devon Amended and Restated Certificate
classifies the Devon Board into three classes having staggered terms of three
years each. The number of directors is fixed from time to time by resolution of
the Devon Board and consists of not less than three directors. The Devon Board
is currently set at nine members. Upon consummation of the Combination, the
Devon Board will be set at eleven members and John A. Hagg and Michael M.
Kanovsky, both current members of the Northstar Board, are expected to be added
as directors. Executive officers of Devon are
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elected annually by the Devon Board to serve in their respective capacities
until their successors are duly elected and qualified or until their earlier
resignation or removal.
<TABLE>
<CAPTION>
DIRECTOR'S
TERM
NAME AGE(1) POSITION WITH THE COMPANY EXPIRING
---- ------ ------------------------- ----------
<S> <C> <C> <C>
John W. Nichols................ 83 Chairman of the Board of Directors 2001
J. Larry Nichols(2)............ 56 President, Chief Executive Officer and Director 2000
Luke R. Corbett................ 51 Director 1999
Thomas F. Ferguson(3).......... 62 Director 2000
David M. Gavrin(4)............. 64 Director 2001
Michael E. Gellert(4).......... 67 Director 1999
Tom J. McDaniel(3)............. 60 Director 2001
H. R. Sanders Jr.(3)........... 66 Director 1999
Lawrence H. Towell............. 55 Director 2000
John A. Hagg................... 51 Director 2000
Michael M. Kanovsky............ 49 Director 1999
J. Michael Lacey............... 52 Vice President -- Operations and Exploration --
Duke R. Ligon.................. 57 Vice President -- General Counsel --
Darryl G. Smette............... 51 Vice President -- Marketing and Administrative --
Planning
H. Allen Turner................ 46 Vice President -- Corporate Development --
William T. Vaughn.............. 51 Vice President -- Finance --
Danny J. Heatly................ 42 Controller --
Gary L. McGee.................. 49 Treasurer --
Marian J. Moon................. 48 Secretary --
</TABLE>
- ---------------
(1) As of October 27, 1998.
(2) Son of John W. Nichols.
(3) Member of Audit Committee.
(4) Member of Compensation and Stock Option Committee.
A biography of each director and officer can be found in Devon's Proxy
Statement for its 1998 Annual Meeting of Stockholders, a copy of which is
included herewith, except Messrs. Hagg and Kanovsky, whose biographies are set
forth below.
John A. Hagg co-founded Canadian Northstar Corporation, Northstar's former
controlling shareholder, in 1977. In 1985, Mr. Hagg became Chairman and
President of Northstar Energy Corporation. Mr. Hagg is a past director of the
Independent Petroleum Association of Canada, the Petroleum Communication
Foundation, Canadian Oilmen's Executive Association, the Calgary Chamber of
Commerce, and past Chairman of Junior Achievement of Southern Alberta. He is
currently a director of the Calgary Philharmonic Orchestra, a member of the
Management Advisory Council at the University of Calgary and a director and
member of the executive committee of the Canadian Association of Petroleum
Producers. In addition, Mr. Hagg is a director of Berry Petroleum Company, a New
York Stock Exchange listed company based in California. He obtained his B.A.
from the University of Alberta in 1968 and his M.B.A. from Stanford University
in 1973.
Michael M. Kanovsky co-founded Canadian Northstar Corporation, Northstar's
former controlling shareholder, with Mr. Hagg in 1977, where he was primarily
responsible for strategic development, finance and acquisitions. He remained in
the position of President of Canadian Northstar Corporation until 1993. He
became a director of Northstar in 1982. Subsequent to his employment with
Canadian Northstar Corporation, Mr. Kanovsky has remained heavily involved in
the oil and gas industry. He is currently the President of Sky Energy
Corporation, a privately held energy corporation. Mr. Kanovsky is currently on
the board of directors of Cabre Exploration Ltd., a Calgary based public oil and
gas company, ARC Resources Ltd., which acquires and develops oil and natural gas
properties for the publicly-traded ARC Energy Trust, and the AGF North
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American Insurance Group. Until recently, Mr. Kanovsky was Chairman of Taro
Industries Ltd., a public oilfield manufacturing company and Vice Chairman of
Precision Drilling Inc., Canada's largest drilling contractor. Mr. Kanovsky is a
past director of the Canadian Association of Oilwell Drilling Contractors, past
Vice-Chairman and Director of the Alberta Children's Hospital and past Chairman
of the Alberta Chapter of the Young Presidents' Organization. He also sits on
the Board of Governors of the University of Western Ontario's Richard Ivey
School of Business. Mr. Kanovsky obtained his B.Sc. in mechanical engineering
from Queens University in Kingston, Ontario in 1970 and his M.B.A. from the
University of Western Ontario in 1973.
PRINCIPAL HOLDERS OF SECURITIES
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT OF DEVON
The table below sets forth as of October 27, 1998, the names and addresses
of each person known by management to own beneficially more than 5% of Devon
outstanding shares of Common Stock, the number of shares beneficially owned by
each such stockholder and the percentage of outstanding shares owned. The table
also sets forth the number and percentage of outstanding shares of Devon Common
Stock beneficially owned by Devon's Chief Executive Officer ("CEO"), each of
Devon's directors, the four most highly compensated executive officers other
than the CEO and by all officers and directors of Devon as a group.
<TABLE>
<CAPTION>
SHARES OF
DEVON PERCENT OF CLASS
BENEFICIALLY PERCENT AFTER COMBINATION
OWNED BEFORE OF CLASS ASSUMING RATIO
NAME OF INDIVIDUAL OR IDENTITY OF GROUP COMBINATION(1) OUTSTANDING(2) OF 0.227:1(3)
--------------------------------------- -------------- -------------- -----------------
<S> <C> <C> <C>
5% HOLDERS
Kerr-McGee Corporation......................... 9,954,000(4) 30.8% 20.8%
123 Robert S. Kerr
Oklahoma City, Oklahoma 73102
Merrill Lynch & Co., Inc....................... 3,841,800(5) 11.3% 7.8%
800 Scudders Mill Road
Plainsboro, New Jersey 08536
Strong Capital Management, Inc.
and Richard S. Strong.......................... 1,666,074(6) 5.2% 3.5%
100 Heritage Reserve
Menomonee Falls, Wisconsin 53051
DIRECTORS AND OFFICERS
J. Larry Nichols*.............................. 730,571(7) 2.2% 1.5%
Michael E. Gellert*............................ 317,720(8) 1.0% 0.7%
H. Allen Turner................................ 122,085(9) 0.4% 0.3%
Darryl G. Smette............................... 121,700(10) 0.4% 0.3%
John W. Nichols*............................... 104,304(11) 0.3% 0.2%
J. Michael Lacey............................... 78,565(12) 0.2% 0.2%
David M. Gavrin*............................... 79,251(13) 0.2% 0.2%
H. R. Sanders, Jr.*............................ 35,979(14) 0.1% <0.1%
Duke R. Ligon.................................. 24,900(15) <0.1% <0.1%
Lawrence H. Towell*............................ 6,100(16) <0.1% <0.1%
Luke R. Corbett*............................... 6,000(17) <0.1% <0.1%
Thomas F. Ferguson*............................ 6,000(18) <0.1% <0.1%
Tom J. McDaniel*............................... 6,000(19) <0.1% <0.1%
All directors and officers of Devon as a
group(20).................................... 1,859,443(20) 5.6% 3.9%
</TABLE>
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- ---------------
* Director. The business address of each director is 20 North Broadway, Suite
1500, Oklahoma City, Oklahoma 73102-8260.
(1) Shares of Devon Common Stock beneficially owned includes shares of Devon
Common Stock issuable upon exercise of options to purchase Devon Common
Stock exercisable within 60 days of October 27, 1998.
(2) At October 27, 1998, there were 32,319,894 shares outstanding.
(3) Assumes the issuance of 15,540,000 Exchangeable Shares, all of which are
Exchangeable for shares of Devon Common Stock.
(4) Kerr-McGee Corporation ("Kerr-McGee") has reported beneficial ownership of
these shares on Schedule 13D filed on January 6, 1997. Kerr-McGee acquired
these shares on December 31, 1996, in connection with a transaction whereby
Devon acquired the North American onshore oil and gas exploration and
production properties and businesses of Kerr-McGee in exchange for
9,954,000 shares of Devon Common Stock. Kerr-McGee reports shared voting
and investment power with respect to these shares. Because of Kerr-McGee's
relatively large ownership position, Devon and Kerr-McGee have entered into
two agreements that define and limit the two companies' rights and
obligations. In addition, the Devon Board amended Devon's Rights Agreement
so that Devon's existing anti-takeover defenses will remain in force for
third parties and/or certain further transactions with Kerr-McGee.
(5) Princeton Services, Inc. ("PSI"), Merrill Lynch Asset Management, L.P.
("MLAM") and Merrill Lynch Growth Fund (the "Fund") have reported
beneficial ownership of these shares on Schedule 13G filed on February 6,
1998. PSI is a parent holding company. MLAM is an investment advisor. The
Fund is an investment company. PSI, MLAM and the Fund report shared voting
and investment power with respect to these shares. ML&Co., ML Group and PSI
disclaim beneficial ownership of such shares. The number of shares reported
includes 1,639,300 shares which MLAM has the right to acquire upon the
conversion of Devon's TCP Securities issued in July, 1996.
(6) Strong Capital Management, Inc. ("Strong Capital") and Richard S. Strong
have reported beneficial ownership of these shares on Schedule 13G filed on
February 16, 1998. Strong Capital is an investment advisor. Richard S.
Strong is Chairman of the Board and principal shareholder of Strong
Capital.
(7) Includes 42,965 shares owned of record by Mr. Nichols as trustee of a
family trust, 78,624 shares owned by Mr. Nichols' wife, 12,570 shares owned
by Mr. Nichols as trustee of his children's trusts as to which he exercises
sole voting and investment power, 6,200 shares owned by Mr. Nichols' son,
6,000 shares owned by Mr. Nichols' daughter and 250,600 shares which are
deemed beneficially owned pursuant to stock options held by Mr. Nichols.
(8) Includes 309,149 shares owned by Windcrest Partners, a limited partnership,
in which Mr. Gellert shares investment and voting power and 6,000 shares
which are deemed beneficially owned pursuant to stock options held by Mr.
Gellert.
(9) Includes 118,600 shares which are deemed beneficially owned pursuant to
stock options held by Mr. Turner.
(10) Includes 118,900 shares that are deemed beneficially owned pursuant to
stock options held by Mr. Smette.
(11) Includes 98,304 shares held by a family investment partnership and 6,000
shares which are deemed beneficially owned pursuant to stock options held
by Mr. Nichols.
(12) Includes 73,400 shares that are deemed beneficially owned pursuant to stock
options held by Mr. Lacey.
(13) Includes 2,141 shares owned by Mr. Gavrin as co-trustee of the Mark Sandler
1987 Trust, 9,249 shares owned by Mr. Gavrin's wife and 6,000 shares which
are deemed beneficially owned pursuant to stock options held by Mr. Gavrin.
(14) Includes 33,000 shares that are deemed beneficially owned pursuant to stock
options held by Mr. Sanders.
(15) Includes 24,600 shares which are deemed beneficially owned pursuant to
stock options held by Mr. Ligon.
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(16) Includes 6,000 shares that are deemed beneficially owned pursuant to stock
options held by Mr. Towell.
(17) Consists of 6,000 shares that are deemed beneficially owned pursuant to
stock options held by Mr. Corbett.
(18) Consists of 6,000 shares that are deemed beneficially owned pursuant to
stock options held by Mr. Ferguson.
(19) Consists of 6,000 shares that are deemed beneficially owned pursuant to
stock options held by Mr. McDaniel.
(20) Includes 877,900 shares that are deemed beneficially owned pursuant to
stock options held by officers and directors.
DEVON CAPITAL STOCK
The authorized capital stock of Devon currently consists of 400,000,000
shares of Devon Common Stock, par value $0.10 per share, and 3,000,000 shares of
preferred stock, par value $1.00 per share. Upon consummation of the
Combination, the authorized capital will be as summarized below and will also
include the Voting Share.
Common Stock
As of October 27, 1998, there were 32,319,894 shares of Devon Common Stock
outstanding held of record by approximately 1,000 stockholders. Holders of Devon
Common Stock are entitled to receive dividends out of funds legally available
therefor when and if declared by the Devon Board. Subject to the rights of the
holders of any outstanding shares of preferred stock, holders of shares of Devon
Common Stock are entitled to cast one vote for each share held of record on all
matters submitted to a vote of stockholders. They are not entitled to cumulative
voting rights for the election of directors. Except pursuant to the Rights
Agreement, the shares of Devon Common Stock have no preemptive, conversion or
other rights to subscribe for or purchase any securities of Devon. The shares of
Devon Common Stock have no redemption or sinking fund provisions. Upon
liquidation or dissolution of Devon, the holders of shares of Devon Common Stock
are entitled to share ratably in any of Devon's assets that remain after payment
or provision for payment to creditors and holders of preferred stock. All
outstanding shares of Devon Common Stock are fully paid and non-assessable, and
the shares of Devon Common Stock issued upon conversion of the TCP Securities
and upon exchange of the Exchangeable Shares will be fully paid and
non-assessable.
TCP Securities
On July 3, 1996, Devon Financing Trust, a Delaware business trust sponsored
by Devon, issued 2,990,000 TCP Securities. The TCP Securities are convertible
into shares of Devon Common Stock at the rate of 1.6393 shares of Devon Common
Stock per TCP Security, or an aggregate of 4,901,507 shares of Devon Common
Stock. The conversion of the TCP Securities may have a dilutive effect on the
current shareholders of Devon and may affect the market price of the shares of
Devon Common Stock.
Preferred Stock
The preferred stock may be issued in one or more series. The Devon Board is
authorized to establish attributes of such series which may include, but are not
limited to, the designation and number of shares constituting each series,
dividend rates payable (cumulative or non-cumulative), voting rights,
redemptions, conversion or preference rights, and any other rights and
qualifications, preferences and limitations or restrictions on shares of such
series. The issuance of preferred stock may have the effect of delaying,
deferring or preventing a change in control of Devon without any further vote or
action by the stockholders and may adversely affect the voting and other rights
of the holders of shares of Devon Common Stock. The specific terms of a
particular series of preferred stock will be described in a certificate of
designation relating to that series. No shares of preferred stock are
outstanding and at present, Devon has no plans to issue any of the
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preferred stock. The Devon Board has designated 300,000 shares of preferred
stock as Series A Junior Participating Preferred Stock (the "Series A Preferred
Stock") in connection with the Rights Agreement.
Special Voting Stock
A single Voting Share will be authorized for issuance and a single Voting
Share will be outstanding having a par value of $0.10 per share. Except as
otherwise required by law or Devon's Amended and Restated Certificate, the
Voting Share will possess a number of votes equal to the number of outstanding
Exchangeable Shares from time to time not owned by Devon or any entity
controlled by Devon for the election of directors and on all other matters
submitted to a vote of Devon Stockholders. The holders of shares of Devon Common
Stock and the holder of the Voting Share will vote together as a single class on
all matters. In the event of a Devon Liquidation Event, all outstanding
Exchangeable Shares will automatically be exchanged for shares of Devon Common
Stock, and the holder of the Voting Share will not be entitled to receive any
assets of Devon available for distribution to its stockholders. The holder of
the Voting Share will not be entitled to receive dividends. Pursuant to the
Combination Agreement, the Voting Share will be issued to the Trustee appointed
under the Voting and Exchange Trust Agreement. At such time as the Voting Share
has no votes attached to it because there are no Exchangeable Shares outstanding
not owned by Devon or an entity controlled by Devon, the Voting Share will be
canceled.
Certain Anti-Takeover and Other Provisions
Share Rights Plan. Under the Rights Agreement, holders of shares of Devon
Common Stock have one right with respect to each share of Devon Common Stock
held. The certificates representing outstanding shares of Devon Common Stock
also evidence one right for each share. Currently the rights trade with the
shares of Devon Common Stock. Holders of Exchangeable Shares will receive one
right with each share of Devon Common Stock they receive upon exchange of their
Exchangeable Shares. Upon the occurrence of certain events generally associated
with an unsolicited takeover attempt of Devon or certain transactions involving
a change of control, the rights will be distributed, will become exercisable and
will be tradable separately from the shares of Devon Common Stock. The Rights
Agreement has been amended to prevent the 1996 merger of Kerr-McGee's North
American onshore properties into Devon from triggering the exercise of rights
under the Rights Agreement.
The rights have certain anti-takeover effects. They will cause substantial
dilution to a person or group that attempts to acquire Devon in a manner that
causes the rights to become exercisable. Devon believes, however, that the
rights should neither affect any prospective offeror willing to negotiate with
the Devon Board nor interfere with any merger or other business combination
approved by the Devon Board. The Devon Board may redeem the rights for $0.01 per
right. The terms of the Rights Agreement may be amended by the Devon Board
without the consent of the Devon Stockholders or the holders of the rights.
Classified Board of Directors. The classification of the Devon Board has
the effect of making it more difficult for stockholders to change the
composition of the Devon Board. At least two annual meetings of Devon
stockholders generally will be required to effect a change in a majority of the
Devon Board. Such a delay may help ensure that the Devon Board, if confronted by
a stockholder attempting to force a proxy contest, a tender or exchange offer or
an extraordinary corporate transaction, would have sufficient time to review the
proposal as well as any available alternatives to the proposal and to act in
what they believe to be the best interests of the stockholders. The
classification provisions will apply to every election of directors, however,
regardless of whether a change in the composition of the Devon Board would be
beneficial to Devon and its stockholders and whether a majority of Devon
Stockholders believes that such a change would be desirable. Pursuant to the
Certificate of Incorporation, the provisions relating to the classification of
directors may only be amended by the affirmative vote of 80% of the then
outstanding shares of capital stock entitled to vote thereon.
Removal of Directors Only for Cause. Pursuant to the OGCA, because Devon
has a classified board of directors, directors can be removed from office only
for cause. Vacancies on the Devon Board may be filled only by the remaining
directors and not by the stockholders.
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Number of Directors. Devon's Certificate of Incorporation provides that the
entire Devon Board will consist of not less than three members, the exact number
to be set from time to time by resolution of the Devon Board. Accordingly, the
Devon Board, and not the stockholders, has the authority to determine the number
of directors and could delay any stockholder from obtaining majority
representation on the Devon Board by enlarging the Devon Board and filling the
new vacancies with its own nominees until the next stockholder election.
No Written Consent of Stockholders. Devon's Certificate of Incorporation
also provides that any action required or permitted to be taken by the
stockholders of Devon must be taken at a duly called annual or special meeting
of stockholders and may not be taken by written consent. In addition, special
meetings may only be called by: (i) the Chairman of the Board; (ii) the
President; or (iii) the Devon Board pursuant to a resolution adopted by a
majority of the then-authorized number of directors.
Certificate of Incorporation and Bylaws. Devon's Certificate of
Incorporation provides that the Devon Board, by a majority vote, may adopt,
alter, amend or repeal provisions of the bylaws.
Business Combination Provisions. Devon's Certificate of Incorporation has
provisions placing limitations on business combinations with a shareholder who
is the beneficial owner of 15% or more of the Devon Common Stock or any
affiliate of such beneficial owner (an "interested shareholder") for a period of
three years from the date a person becomes an interested shareholder. The effect
of these provisions is to limit unsolicited takeover attempts or certain
transactions involving a change of control. Such business combinations are
permitted, however, under certain circumstances, including super-majority
shareholder approval.
Directors' Liability. Devon's Certificate of Incorporation also provides
for the elimination of directors' liability for monetary damages for a breach of
certain fiduciary duties and for indemnification of directors, officers,
employees or agents of Devon as permitted by the OGCA. These provisions cannot
be amended without the affirmative vote of the holders of at least 80% of the
outstanding shares entitled to vote. Under Devon's Certificate of Incorporation,
even though Devon's directors stand in a fiduciary relation to Devon, they are
not liable to stockholders of Devon for damages for breach of any such fiduciary
duty, except that a director will be personally liable for: (i) acts or
omissions not in good faith or which involve intentional misconduct or a knowing
violation of law; (ii) the payment of dividends or redemption or purchase of
stock in violation of the OGCA; (iii) any breach of the duty of loyalty to Devon
or its stockholders; or (iv) any transaction from which the director derived an
improper personal benefit.
Transfer Agent And Registrar. The transfer agent and registrar for the
shares of Devon Common Stock is Boston EquiServe, Client Administration, Mail
Stop 45-02-62, P.O. Box 1865, Boston, MA 02105-1865.
NORTHSTAR SHARE CAPITAL
On the completion of the Arrangement, the share capital of Northstar will
be as summarized below. Such summary is qualified in its entirety by reference
to the Plan of Arrangement and the Exchangeable Share Provisions which are
attached as Annex E hereto.
Northstar Common Shares
The Northstar Shareholders will be entitled to receive notice of and to
attend all meetings of the Northstar Shareholders and will be entitled to one
vote per Northstar Common Share held on all matters submitted to a vote of the
holders of the Northstar Common Shares. The Northstar Shareholders will also be
entitled to receive such dividends as may be declared by the Northstar Board out
of funds legally available therefor and, upon any liquidation, dissolution or
winding-up of Northstar, subject to the prior rights of the holders of the
Exchangeable Shares and any other shares ranking senior to the Northstar Common
Shares, to receive ratably the remaining property and assets of Northstar.
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Exchangeable Shares
Ranking of Exchangeable Shares of Northstar. The Exchangeable Shares will
rank prior to the Northstar Common Shares and any other shares ranking junior to
the Exchangeable Shares with respect to the payment of dividends and the
distribution of assets in the event of the liquidation, dissolution or
winding-up of Northstar.
Dividends. Holders of Exchangeable Shares will be entitled to receive
dividends equivalent to dividends paid from time to time by Devon on shares of
Devon Common Stock. The declaration date, record date and payment date for
dividends on the Exchangeable Shares will be the same as that for the
corresponding dividends on the shares of Devon Common Stock.
Certain Restrictions. Without the approval of the holders of the
Exchangeable Shares (other than Devon or its Subsidiaries), Northstar will not:
(i) pay any dividends on the Northstar Common Shares, or any other shares
ranking junior to the Exchangeable Shares, other than stock dividends payable in
such other shares ranking junior to the Exchangeable Shares; (ii) redeem,
purchase or make any capital distribution in respect of the Northstar Common
Shares or any other shares ranking junior to the Exchangeable Shares; (iii)
redeem or purchase any other shares of Northstar ranking equally with the
Exchangeable Shares with respect to the payment of dividends or on any
liquidation distribution; or (iv) amend the Northstar Articles or Northstar
Bylaws, in either case in any manner that would affect the rights or privileges
of the holders of the Exchangeable Shares. The restrictions in (i), (ii) and
(iii) above will not apply at any time when the dividends on the outstanding
Exchangeable Shares corresponding to dividends declared on the Devon Common
Stock have been declared and paid in full. If a meeting of the holders of
Exchangeable Shares is called an Automatic Redemption Date will occur, except
where such meeting is for the purpose of approving measures to maintain the
economic and legal equivalence of the Exchangeable Shares and the Devon Common
Stock and such measures are approved. See "The Combination -- Combination
Mechanics and Description of Exchangeable Shares -- Exchange and Redemption
Rights -- Automatic Redemption."
Liquidation. In the event of a Northstar Insolvency Event, a holder of
Exchangeable Shares will be entitled to receive for each Exchangeable Share one
share of Devon Common Stock, plus the Dividend Amount, if any. See "The
Combination -- Combination Mechanics and Description of Exchangeable
Shares -- Exchange and Redemption Rights -- Optional Exchange Right."
Exchange Put Right. Holders of the Exchangeable Shares will be entitled at
any time following the Effective Time to require Devon to exchange all or any
part of the Exchangeable Shares owned by them and to receive an equivalent
number of shares of Devon Common Stock, plus the Dividend Amount, if any. See
"The Combination -- Combination Mechanics and Description of Exchangeable
Shares -- Exchange and Redemption Rights -- Exchange Put Right."
Retraction of Exchangeable Shares by Holders. A holder of Exchangeable
Shares will be entitled at any time to require Northstar to retract (i.e.,
require Northstar to redeem) any or all of the Exchangeable Shares held by such
holder by delivering to the holder one share of Devon Common Stock, plus the
Dividend Amount, if any, for each Exchangeable Share, which shall be delivered
to the retracting holder on the Retraction Date specified by the holder (which
shall not be less than five nor more than ten Business Days after the date on
which Northstar receives the Retraction Request from the holder). See "The
Combination -- Combination Mechanics and Description of Exchangeable
Shares -- Exchange and Redemption Rights -- Retraction Rights." This right is
subject to Devon's Retraction Call Right. See "The Combination -- Combination
Mechanics and Description of Exchangeable Shares -- Call Rights -- Retraction
Call Right." The tax consequences to a holder of Exchangeable Shares upon
exercising the right to require Northstar to retract will be substantially
different than the tax consequences of exercising the Exchange Put Right
described above. See "Income Tax Considerations to Northstar Shareholders and
Optionholders -- Canadian Federal Income Tax Consequences to Northstar
Shareholders and Optionholders."
If, as a result of liquidity or solvency requirements or other provisions
of applicable law, Northstar is not permitted to redeem all Exchangeable Shares
tendered by a retracting holder, Northstar will redeem only those Exchangeable
Shares tendered by the holder (rounded down to a whole number of shares) as
would not
128
<PAGE> 135
be contrary to such provisions of applicable law. This right is subject to
Devon's Liquidation Call Right. See "The Combination -- Combination Mechanics
and Description of Exchangeable Shares -- Call Rights -- Liquidation Call
Right." The holder of any Exchangeable Shares not redeemed by Northstar will be
deemed to have required Devon to purchase such unretracted shares in exchange
for Devon Common Stock, plus the Dividend Amount, if any. See "The
Combination -- Combination Mechanics and Description of Exchangeable
Shares -- Exchange and Redemption Rights."
Automatic Redemption of Exchangeable Shares. On an Automatic Redemption
Date, Northstar will redeem all but not less than all of the then outstanding
Exchangeable Shares by delivering to the holder one share of Devon Common Stock,
plus the Dividend Amount, if any, for each Exchangeable Share. At least 45 days
prior to the Automatic Redemption Date described above or before a possible
Automatic Redemption Date which may result from a failure of the holders of
Exchangeable Shares to take necessary action as described in clause (d) of the
definition of Automatic Redemption Date, Northstar shall provide the registered
holders of the Exchangeable Shares with written notice of the proposed
redemption of the Exchangeable Shares of Northstar. This right is subject to
Devon's Redemption Call Right. In the case of any notice given in connection
with a possible Automatic Redemption Date, such notice will be given
contingently and will be withdrawn if the contingency does not occur. If an
Automatic Redemption Date occurs, the holders of Exchangeable Shares will
receive Devon Common Stock in exchange for their Exchangeable Shares. The
holders of Exchangeable Shares will be, in general, automatically subjected to
income taxes on such exchange even though they made no election to exchange
their Exchangeable Shares. See "The Combination -- Mechanics and Description of
Exchangeable Shares -- Call Rights -- Redemption Call Right."
Voting Rights. Under the ABCA, holders of Exchangeable Shares have separate
class voting rights on any change in the fundamental terms of those shares,
which rights mirror those provided under the Exchangeable Share Provisions as
described under "-- Amendment and Approval." In addition, the holders of
Exchangeable Shares have the right to vote on any change in the related terms in
the Support Agreement and the Voting and Exchange Trust Agreement. If the
holders fail to take necessary action to approve or disapprove, as applicable, a
change in the terms of the Exchangeable Shares or the related terms in the
Support Agreement and the Voting and Exchange Trust Agreement, if such approval
or disapproval, as applicable, would be required to maintain the economic and
legal equivalence of the Exchangeable Shares and the Devon Common Stock,
Northstar will automatically be required to redeem the Exchangeable Shares as
described above. Additionally, under the ABCA, the holders of Exchangeable
Shares have the right to vote on certain fundamental changes in Northstar,
including an amalgamation (other than an amalgamation with a wholly-owned
subsidiary of Northstar), a continuance or reincorporation in another
jurisdiction, a sale, lease or exchange of all or substantially all of the
assets of Northstar out of the ordinary course of business, a plan of
arrangement and a voluntary dissolution. If the Northstar Board proposes such a
fundamental change, Northstar will automatically be required to redeem the
Exchangeable Shares prior to the record date for the required shareholder vote
as described above.
Amendment and Approval. The rights, privileges, restrictions and conditions
attaching to the Exchangeable Shares may be changed only with the approval of
the holders thereof (other than Devon or its Subsidiaries). Any such approval or
any other approval or consent to be given by the holders of the Exchangeable
Shares will be sufficiently given if given in accordance with applicable law and
subject to a minimum requirement that such approval or consent be evidenced by a
resolution passed by not less than two-thirds of the votes cast thereon (other
than shares beneficially owned by Devon or its Subsidiaries) at a meeting of the
holders of Exchangeable Shares duly called and held at which holders of at least
25% of the then outstanding Exchangeable Shares are present or represented by
proxy. In the event that no such quorum is present at such meeting within
one-half hour after the time appointed therefor, then the meeting will be
adjourned to such place and time not less than 10 days later as may be
determined at the original meeting by the chairman of the meeting, and holders
of Exchangeable Shares present or represented by proxy at the adjourned meeting
may transact the business for which the meeting was originally called. At the
adjourned meeting, a resolution passed by the affirmative vote of not less than
two-thirds of the votes cast thereon (other
129
<PAGE> 136
than shares beneficially owned by Devon or its Subsidiaries) will constitute the
approval or consent of the holders of the Exchangeable Shares.
Actions of Northstar under Support Agreement. Under the Exchangeable Share
Provisions, Northstar will agree to take all such actions and do all such things
as are necessary or advisable to perform and comply with its obligations under,
and to ensure the performance and compliance by Devon with its obligations
under, the Support Agreement.
DEVON'S SELECTED FINANCIAL DATA
For Devon's selected financial data, see Devon's Annual Report on Form 10-K
for the fiscal year ended December 31, 1997, and Devon's Quarterly Report on
Form 10-Q for the Quarter ended June 30, 1998, copies of which are included
herewith.
DEVON MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
For a discussion of "Devon Management's Discussion and Analysis of
Financial Condition and Results of Operations," refer to Devon's Annual Report
on Form 10-K for the fiscal year ended December 31, 1997, Devon's Quarterly
Report on Form 10-Q for the quarter ended June 30, 1998 and Devon's First
Amendment to Quarterly Report on Form 10-Q for the quarter ended June 30, 1998,
copies of which are included herewith.
130
<PAGE> 137
NORTHSTAR'S SELECTED FINANCIAL DATA
The following selected financial information (not covered by the
independent auditors' report) should be read in conjunction with "Northstar
Management's Discussion and Analysis of Financial Condition and Results of
Operations," and Northstar's consolidated financial statements and the notes
thereto included elsewhere herein. In March, 1997, Northstar acquired all the
outstanding common shares of Morrison by issuing approximately 46.1 million
Northstar Common Shares. The Northstar Common Shares received by the Morrison
shareholders represented approximately 53% of the combined company's outstanding
shares. Therefore, under U.S. GAAP, this transaction would be accounted for as a
reverse acquisition of Northstar by Morrison. Accordingly, the results presented
for periods through March, 1997 for Northstar using U.S. GAAP represent the
historical results of Morrison, the "accounting acquirer." Because Northstar was
the "legal acquirer," the financial results for periods through March, 1997, are
referred to as "Northstar's" results, even though they represent the historical
results of Morrison. For periods subsequent to March, 1997, the results
presented for Northstar using U.S. GAAP represent the historical results of
Morrison, combined with the results of Northstar after valuing Northstar's
March, 1997, assets and liabilities at fair value, rather than historical book
value.
Under Canadian GAAP, the Morrison transaction was accounted for under the
pooling-of-interests method of accounting. Accordingly, for Northstar's results
presented using Canadian GAAP, the historical results of Northstar and Morrison
have been combined for all periods presented.
<TABLE>
<CAPTION>
SIX MONTHS
ENDED JUNE 30, YEARS ENDED DECEMBER 31,
------------------------- -------------------------------------------------------------
1998(1) 1997(1) 1997(1) 1996(1) 1995(1) 1994(1) 1993(1)
----------- ----------- ----------- ----------- --------- --------- ---------
(THOUSANDS, EXCEPT PER SHARE DATA, PER UNIT DATA AND RATIOS)
<S> <C> <C> <C> <C> <C> <C> <C>
NORTHSTAR -- USING U.S. GAAP
OPERATING RESULTS
Oil sales...................... C$ 43,410 C$ 39,221 C$ 102,824 C$ 76,236 C$ 82,658 C$ 73,993 C$ 63,905
Gas sales...................... 52,475 34,508 95,391 45,559 28,041 24,101 18,934
NGL sales...................... 2,458 2,962 4,382 6,728 3,682 3,119 3,023
Other revenue(2)............... 14,168 47,314 55,596 45,172 18,330 17,107 11,304
----------- ----------- ----------- ----------- --------- --------- ---------
Total revenue.............. 112,511 124,005 258,193 173,695 132,711 118,320 97,166
Lease operating expenses....... 29,751 21,611 48,784 37,062 33,486 26,079 17,535
Production taxes............... 1,052 794 1,804 303 301 433 349
Depreciation, depletion and
amortization................. 23,338 40,869 116,003 36,761 48,445 45,351 32,923
General and administrative
expenses..................... 7,296 7,686 15,863 8,199 8,890 7,476 6,921
Interest expense............... 15,602 7,607 25,629 10,075 5,254 1,288 1,784
Deferred effect of changes in
foreign currency exchange
rate on long-term debt....... 10,012 369 8,111 272 421 -- --
Reduction of carrying value of
oil and gas properties(3).... -- -- 865,883 -- 133,015 29,560 --
Net earnings (loss)(4)......... 12,503 23,848 (519,495) 44,750 (55,359) 4,336 19,759
Net earnings (loss) per share:
Basic(4)..................... 0.18 0.35 (8.24) 0.99 (1.25) 0.11 0.56
Diluted(4)................... 0.18 0.35 (8.24) 0.99 (1.25) 0.11 0.56
Cash dividends per share(5).... -- -- -- 0.06 0.06 0.06 0.06
Weighted average common shares
outstanding.................. 68,167 68,761 63,080 45,326 44,250 40,691 35,116
Ratio of earnings to fixed
charges(6)................... 1.99 6.57 NA 8.47 NA 6.57 20.24
BALANCE SHEET DATA (END OF
PERIOD)
Total assets................... C$ 634,628 C$1,345,821 C$ 674,906 C$ 642,892 C$403,145 C$393,471 C$294,321
Long-term debt................. 443,384 432,242 436,383 102,720 105,249 12,293 29,441
Stockholders' equity........... 89,969 617,872 75,704 282,658 239,604 286,871 189,252
</TABLE>
131
<PAGE> 138
<TABLE>
<CAPTION>
SIX MONTHS
ENDED JUNE 30, YEARS ENDED DECEMBER 31,
------------------------- -------------------------------------------------------------
1998(1) 1997(1) 1997(1) 1996(1) 1995(1) 1994(1) 1993(1)
----------- ----------- ----------- ----------- --------- --------- ---------
(THOUSANDS, EXCEPT PER SHARE DATA, PER UNIT DATA AND RATIOS)
<S> <C> <C> <C> <C> <C> <C> <C>
CASH FLOW DATA
Net cash provided by operating
activities................... 41,563 30,138 122,022 78,540 83,404 98,632 72,888
Net cash provided (used) by
investing activities......... 29,120 148,441 (5,224) (247,118) (193,239) (156,353) (134,143)
Net cash provided (used) by
financing activities......... (70,683) (207,668) (145,887) 164,200 102,603 74,398 58,582
Modified EBITDA(7)(9).......... 74,412 93,914 191,742 128,131 90,034 84,332 72,361
Cash margin(8)(9).............. 57,805 85,224 163,822 116,521 83,688 82,306 70,018
PRODUCTION, PRICE AND OTHER DATA
Production:
Oil (MBbls).................. 2,708 1,873 4,778 2,964 3,830 4,034 3,645
Gas (MMcf)................... 30,044 19,350 52,483 26,472 21,348 12,074 10,480
NGLs (MBbls)................. 241 122 265 303 231 219 204
MBoe(10)..................... 7,956 5,220 13,790 7,679 7,619 6,265 5,595
Average prices:
Oil (per Bbl)................ C$ 16.03 C$ 20.94 C$ 21.52 C$ 25.72 C$ 21.58 C$ 18.34 C$ 17.53
Gas (per Mcf)................ 1.75 1.78 1.82 1.72 1.31 2.00 1.81
NGLs (per Bbl)............... 10.20 24.28 16.54 22.21 15.94 14.24 14.82
Per Boe(10).................. 12.37 14.69 14.69 16.74 15.01 16.16 15.35
Costs per Boe(10):
Operating costs.............. 3.87 4.29 3.67 4.87 4.43 4.23 3.20
Depreciation, depletion and
amortization of oil and gas
properties................. 2.83 7.68 8.29 4.67 6.25 7.05 5.75
Reduction of carrying value
of oil and gas
properties................. -- -- 62.79 -- 17.46 4.72 --
General and administrative
expenses................... 0.92 1.47 1.15 1.07 1.17 1.19 1.24
NORTHSTAR -- USING CANADIAN GAAP
OPERATING RESULTS
Oil sales...................... C$ 54,453 C$ 81,921 C$ 165,385 C$ 195,497 C$156,755 C$110,080 C$ 87,565
Gas sales...................... 72,691 67,782 139,776 123,504 93,221 95,495 63,413
NGL sales...................... 2,300 7,541 8,114 15,127 11,143 6,637 5,369
Less royalties................. (19,177) (34,381) (57,776) (63,138) (43,372) (37,074) (21,075)
----------- ----------- ----------- ----------- --------- --------- ---------
Oil, gas and NGL sales, net of
royalties.................... 110,267 122,863 255,499 270,990 217,747 175,138 135,272
Other revenue.................. 44,153 47,177 51,387 37,140 12,163 12,934 7,348
----------- ----------- ----------- ----------- --------- --------- ---------
Total revenue.............. 154,420 170,040 306,886 308,130 229,910 188,072 142,620
Lease operating expenses....... 29,110 24,585 53,274 56,940 47,852 30,481 19,892
Depreciation, depletion and
amortization................. 61,353 56,391 118,815 119,828 101,353 73,419 54,206
General and administrative
expenses..................... 6,876 7,222 12,494 7,639 8,969 8,078 6,334
Interest expense............... 15,602 9,171 31,305 17,105 12,392 2,229 3,025
Net earnings................... 32,705 40,982 50,065 62,062 36,578 43,445 36,915
Net earnings per share:
Basic........................ 0.48 0.52 0.68 0.72 0.45 0.56 0.53
Diluted...................... 0.46 0.50 0.66 0.70 0.44 0.55 0.52
Cash dividends per share(5).... -- -- -- 0.03 0.03 0.03 0.03
Weighted average common shares
outstanding.................. 68,167 79,186 73,505 85,832 81,270 77,243 69,063
Ratio of earnings to fixed
charges(6)................... 3.64 8.84 3.68 7.20 4.74 37.00 18.30
BALANCE SHEET DATA (END OF
PERIOD)
Total assets................... C$1,169,202 C$1,059,121 C$1,178,162 C$1,244,884 C$924,781 C$683,762 C$516,912
Long-term debt................. 443,384 432,242 435,141 184,896 210,529 18,547 36,842
Stockholders' equity........... 426,563 381,899 392,095 638,072 521,687 478,325 339,990
</TABLE>
132
<PAGE> 139
<TABLE>
<CAPTION>
SIX MONTHS
ENDED JUNE 30, YEARS ENDED DECEMBER 31,
------------------------- -------------------------------------------------------------
1998(1) 1997(1) 1997(1) 1996(1) 1995(1) 1994(1) 1993(1)
----------- ----------- ----------- ----------- --------- --------- ---------
(THOUSANDS, EXCEPT PER SHARE DATA, PER UNIT DATA AND RATIOS)
<S> <C> <C> <C> <C> <C> <C> <C>
CASH FLOW DATA
Net cash provided (used) by
operating activities......... 49,127 68,527 170,885 200,776 147,286 157,737 120,683
Net cash provided (used) by
investing activities......... 21,499 120,458 (42,100) (366,984) (368,264) (257,584) (189,028)
Net cash provided (used) by
financing activities......... (70,626) (222,844) (162,644) 190,189 208,283 79,686 107,852
Modified EBITDA(7)(9).......... 118,434 138,233 241,118 243,551 173,089 149,513 116,394
Cash margin(8)(9).............. 101,561 127,626 206,987 223,619 159,001 146,546 112,500
PRODUCTION, PRICE AND OTHER DATA
Production(11):
Oil (MBbls).................. 3,380 3,695 7,472 7,985 7,425 5,997 4,966
Gas (MMcf)................... 36,665 35,280 74,664 77,958 68,478 47,742 35,369
NGLs (MBbls)................. 225 320 456 765 776 518 371
MBoe(12)..................... 7,272 7,543 15,394 16,546 15,048 11,289 8,874
Average prices(13):
Oil (per Bbl)................ C$ 16.11 C$ 22.17 C$ 22.13 C$ 24.48 C$ 21.11 C$ 18.36 C$ 17.63
Gas (per Mcf)................ 1.98 1.92 1.87 1.58 1.36 1.98 1.79
NGLs (per Bbl)............... 10.22 23.57 17.79 19.77 14.36 12.81 14.47
Per Boe(11).................. 17.80 20.85 20.38 20.22 17.35 18.71 17.61
Costs per Boe(11)(14):
Operating costs.............. 4.00 3.26 3.47 3.45 3.18 2.70 2.24
Depreciation, depletion and
amortization of oil and gas
properties................. 8.32 7.37 7.61 7.14 6.63 6.35 5.95
General and administrative
expenses................... 0.95 0.96 0.81 0.46 0.60 0.72 0.71
</TABLE>
- ---------------
(1) In March, 1997, Northstar acquired all the outstanding common shares of
Morrison by issuing approximately 46.1 million Northstar Common Shares. The
Northstar Common Shares received by the Morrison shareholders represented
approximately 53% of the combined company's outstanding shares. Therefore,
under U.S. GAAP, this transaction would be accounted for as a reverse
acquisition of Northstar by Morrison. Accordingly, the results presented
for periods through March, 1997 for Northstar using U.S. GAAP represent the
historical results of Morrison, the "accounting acquirer." Because
Northstar was the "legal acquirer," the financial results for periods
through March, 1997, are referred to as "Northstar's" results, even though
they represent the historical results of Morrison. For periods subsequent
to March, 1997, the results presented for Northstar using U.S. GAAP
represent the historical results of Morrison, combined with the results of
Northstar after valuing Northstar's March, 1997, assets and liabilities at
fair value, rather than historical book value.
Under Canadian GAAP, the Morrison transaction was accounted for under the
pooling-of-interests method of accounting. Accordingly, for Northstar's
results presented using Canadian GAAP, the historical results of Northstar
and Morrison have been combined for all periods presented.
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<PAGE> 140
(2) Under U.S. GAAP, Northstar's other revenues consisted of the following
items:
<TABLE>
<CAPTION>
SIX MONTHS
ENDED JUNE 30, YEAR ENDED DECEMBER 31,
------------------- ----------------------------------------------------
1998 1997 1997 1996 1995 1994 1993
-------- -------- -------- -------- -------- -------- --------
(THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
Third party gas
processing
income............. C$ 2,577 C$ 4,976 C$ 5,602 C$ 8,613 C$ 2,008 C$ 1,090 C$ --
Gain from termination
of gas contract.... 7,300 -- -- -- -- -- --
Management contract
termination fee.... 4,000 -- -- -- -- -- --
Gain (loss) on sale
of assets.......... (198) 40,696 40,671 14,453 -- -- --
Management and
administration
fees............... 1,433 3,991 6,766 8,382 6,176 5,234 6,129
Alberta royalty tax
credits............ 748 878 1,732 1,625 1,474 1,915 1,802
Marketing revenues... -- -- -- (633) 178 -- 89
Pipeline revenues.... -- -- -- 4,714 4,357 3,638 1,785
Earnings (loss) from
equity
investments........ (1,304) (2,717) 529 4,856 937 -- --
Interest and other... (388) (510) 296 3,162 3,200 5,230 1,499
-------- -------- -------- -------- -------- -------- --------
Total....... C$14,168 C$47,314 C$55,596 C$45,172 C$18,330 C$17,107 C$11,304
======== ======== ======== ======== ======== ======== ========
</TABLE>
Under Canadian GAAP, Northstar's other revenues consisted of the following
items:
<TABLE>
<CAPTION>
SIX MONTHS
ENDED JUNE 30, YEAR ENDED DECEMBER 31,
------------------- ---------------------------------------------------
1998 1997 1997 1996 1995 1994 1993
-------- -------- -------- -------- -------- -------- -------
(THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
Gain (loss) on sale of
assets............... C$39,949 C$40,696 C$40,671 C$14,453 C$ -- C$ -- C$ --
Management contract
termination fee...... 4,000 -- -- -- -- -- --
Earnings (loss) from
equity investments... -- 3,999 8,578 8,111 1,905 -- --
Operator overhead...... 592 888 1,504 963 793 280 1,275
Marketing revenues..... -- -- -- (633) 178 -- 89
Administration fees.... -- 79 79 1,636 1,614 2,245 1,865
Pipeline revenues...... -- -- -- 4,714 4,357 3,638 1,785
Processing fees........ -- -- -- 4,221 -- -- --
Interest and other..... (388) 1,515 555 3,675 3,316 6,771 2,334
-------- -------- -------- -------- -------- -------- -------
Total......... C$44,153 C$47,177 C$51,387 C$37,140 C$12,163 C$12,934 C$7,348
======== ======== ======== ======== ======== ======== =======
</TABLE>
See notes 3 and 11 to Northstar's consolidated financial statements
included elsewhere in this Joint Proxy Statement for additional information
regarding the gains on sales of assets recognized by Northstar under
Canadian GAAP as shown in the above table.
(3) Under U.S. GAAP, companies using the full cost method of accounting for oil
and gas properties are required to make a "ceiling" calculation that
compares the net book value of the oil and gas properties, less related
deferred income taxes, to the estimated after-tax future net revenues from
proved oil and gas properties, discounted at 10% per year. To the extent
that the net book value, less related deferred income taxes, exceeds the
"ceiling", a reduction of carrying value of oil and gas properties is
required. As of December 31, 1997, 1995 and 1994, the carrying value of
Northstar's oil and gas properties, less deferred income taxes, restated to
the U.S. full cost method of accounting, exceeded the full cost ceiling by
C$550.9 million, C$73.7 million and C$16.5 million, respectively.
Accordingly, a C$865.9 million reduction of the carrying value of oil and
gas properties was recorded in 1997, partially offset by a related C$315.0
million deferred income tax benefit. A C$133.0 million reduction of the
carrying value was recorded in 1995, partially offset by a related C$59.3
million deferred tax benefit and in 1994, a
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<PAGE> 141
C$29.6 million reduction of the carrying value was recorded, partially
offset by a related $13.1 million deferred tax benefit.
(4) Net earnings in 1993, using U.S. GAAP, includes earnings of $3.3 million,
or $0.09 per share for the cumulative effect of a change in accounting for
income taxes.
(5) Dividends shown represent dividends paid by Morrison on its common shares.
(6) For purposes of calculating the ratio of earnings to fixed charges, (i)
earnings consist of earnings before income taxes and cumulative effect of
accounting change, plus fixed charges, and (ii) fixed charges consist of
interest expense, amortization of costs relating to indebtedness, and
one-third of rental expense estimated to be attributable to interest. Using
U.S. GAAP, Northstar's earnings for the years ended December 31, 1997 and
1995, were insufficient to cover fixed charges by C$823.9 and C$97.1
million, respectively.
(7) Modified EBITDA represents earnings before interest (including, under U.S.
GAAP, deferred effect of changes in foreign currency exchange rate on
long-term debt), taxes, depreciation, depletion and amortization.
(8) "Cash margin" equals total revenues less cash expenses. Cash expenses are
all expenses other than the non-cash expenses of depreciation, depletion
and amortization, deferred effect of changes in foreign currency exchange
rate on long-term debt and deferred income tax expense. Cash margin
measures the net cash that is generated by a company's operations during a
given period, without regard to the period such cash is actually physically
received or spent by the company. This margin ignores the non-operational
effect on a company's "net cash provided by operating activities," as
measured by generally accepted accounting principles, from a company's
activities as an operator of oil and gas wells. Such activities produce net
increases or decreases in temporary cash funds held by the operator which
have no effect on net earnings of the company.
(9) Modified EBITDA is presented because it is commonly accepted in the oil and
gas industry as a financial indicator of a company's ability to service or
incur debt and because it is a component of Northstar's debt covenants.
Cash margin is presented because it is commonly accepted in the oil and gas
industry as a financial indicator of a company's ability to fund capital
expenditures or service debt. Modified EBITDA and cash margin are also
presented because investors routinely request such information. Management
interprets the trends of modified EBITDA and cash margin in a similar
manner as trends in net earnings.
Modified EBITDA and cash margin should be used as supplements to, and not
as substitutes for, net earnings and net cash provided by operating
activities determined in accordance with generally accepted accounting
principles as measures of Northstar's profitability or liquidity. There may
be operational or financial demands and requirements that reduce
management's discretion over the use of modified EBITDA and cash margin.
See "Northstar Management's Discussion and Analysis of Financial Condition
and Results of Operations" elsewhere in this Joint Proxy Statement.
Modified EBITDA and cash margin may not be comparable to similarly titled
measures used by other companies.
(10) Gas volumes are converted to Boe or MBoe under U.S. GAAP at the rate of six
Mcf of gas per Bbl of oil, based upon the approximate relative energy
content of natural gas and oil, which rate is not necessarily indicative of
the relationship of oil and gas prices. The respective prices of oil, gas
and NGLs are affected by market and other factors in addition to relative
energy content.
(11) Northstar's production volumes using Canadian GAAP include gross volumes
attributable to Northstar and the respective royalty interests.
(12) Northstar's gas volumes for Canadian GAAP are converted to Boe or MBoe at
the rate of ten Mcf of gas per Bbl of oil.
(13) Northstar's average prices using Canadian GAAP are the gross values of oil,
gas and NGLs sales, including royalties, divided by the gross volumes
described in (11) above.
(14) Northstar's costs per Boe using Canadian GAAP are calculated using the
gross volumes described in (11) above.
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NORTHSTAR MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(ALL DOLLAR AMOUNTS IN THIS SECTION ARE IN CANADIAN DOLLARS, UNLESS OTHERWISE
INDICATED)
Northstar completed a business combination with Morrison on March 14, 1997
by issuing Northstar Common Shares from treasury in exchange for all of the
outstanding shares of Morrison. Prior to March 1997, Northstar's principal
assets consisted of oil and gas properties in Western Canada and a 48% interest
in the West Windsor cogeneration plant in West Windsor, Ontario. Morrison's
principal assets in March 1997 consisted of oil and gas properties in Western
Canada, and a 22% interest in Morrison Middlefield Resources Ltd. ("MMRL"), a
publicly traded company with oil and gas assets co-managed by Morrison, for
which Morrison received management fees.
As a result of the business combination, Morrison became a wholly-owned
subsidiary of Northstar. In connection with the Morrison transaction, Northstar
repurchased 20.7 million Northstar Common Shares for $300 million pursuant to an
issuer bid effected immediately following the completion of the business
combination.
Before the completion of the business combination of Northstar and
Morrison, Morrison had been in the process of divesting its non-core businesses
and assets. During this process, Morrison: (i) in January 1997, sold its Nevis
gas processing plant and a crude oil pipeline to the Morrison Facilities Income
Fund for $178.8 million, resulting in a gain of $40.7 million; (ii) in December
1996, sold non-core producing properties for $64.5 million; (iii) in November
1996, sold its investment in Canadian Gas Gathering Systems Inc. ("CGGS") for a
gain of $14.5 million; and (iv) relinquished its right to receive management
fees for managing CGGS.
At the time of the business combination with Morrison, Northstar reaffirmed
the policy of concentrating on its core oil and gas assets and seeking to divest
other assets. On July 31, 1998, Northstar exchanged its 22% interest in MMRL for
MMRL's 50% interest in Mountain Energy Inc., a privately-held Canadian oil and
gas company, whose principal assets are producing oil and gas properties located
in the central region of Alberta. As a result of the exchange, Northstar now
owns 100% of Mountain Energy Inc. In the first quarter of 1998, Northstar
entered into agreements to sell other non-core oil and gas assets for $75
million, of which $45 million was received prior to March 31, 1998, and sold its
interest in the West Windsor cogeneration plant for $72.3 million, resulting in
a gain of $40.1 million.
The business combination has been accounted for using the
"pooling-of-interests" method of accounting under Canadian GAAP. The
pooling-of-interest method of accounting is used in Canada only in those
situations where, after completion of a combination, the share ownership and the
composition of the board of directors and senior management of the surviving
company represents a pooling of the resources of the predecessor corporations.
Under the Canadian GAAP pooling-of-interests method of accounting, the
consolidated financial results of Northstar include Morrison's operations for
all periods prior to the combination. The pooling-of-interests method differs
significantly from the more common purchase method, where the results of the
acquired entity would only have been included with the acquiror's financial and
operating data subsequent to the acquisition date.
The management's discussion and analysis set forth herein discusses
principally the results of Northstar presented in Canadian GAAP, which include
the results of Northstar and Morrison for all periods on a pooling-of-interests
basis. Under U.S. GAAP the business combination with Morrison is accounted for
significantly differently from the Canadian GAAP pooling-of-interests method,
with Morrison being deemed the acquiror for accounting purposes. Reference is
made to Note 13 to the consolidated financial statements of Northstar and to
"Unaudited U.S. GAAP Financial Information -- Northstar" for information
concerning the reconciliation of Northstar's financial information to U.S. GAAP.
OIL AND GAS SALES
June 30, 1998 vs June 30, 1997. Production of natural gas, oil and NGLs for
the first half of 1998 totalled 40,200 Boe per day. This was a decrease of 3.6%
from the first six months of 1997 due to the sale of non-core producing
properties in the first quarter of 1998. Also, as a result of lower prices for
oil and NGLs,
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partially offset by an increase in natural gas prices, oil and gas sales
decreased to $129.4 million, or a 17.7% decrease from the 1997 first half oil
and gas sales of $157.2 million.
A summary comparing first half 1998 production volumes, revenues and prices
to the first half of 1997 shows increases in natural gas volumes and prices, but
reductions in oil and NGLs production and prices. As a result, gas sales were up
in the 1998 period, but this increase was more than offset by lower oil and NGLs
sales.
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
------------------
1998 1997 % CHANGE
------- ------- --------
<S> <C> <C> <C>
DAILY PRODUCTION
Gas (MMcf)............................................ 203 195 4
Oil and NGLs (Bbls)................................... 19,900 22,200 (10)
Total (Boe)(1).............................. 40,200 41,700 (4)
REVENUES ($ THOUSANDS)
Gas................................................... $72,691 $67,782 7
Oil and NGLs.......................................... 56,753 89,462 (37)
Total....................................... 129,444 157,244 (18)
AVERAGE PRICES
Gas (per Mcf)......................................... $ 1.98 $ 1.92 3
Oil and NGLs (per Bbl)................................ 15.74 22.28 (29)
Total (per Boe)(1).......................... 17.80 20.85 (15)
</TABLE>
- ---------------
(1) Gas is converted to Boe at the rate of ten Mcf of gas to one per Bbl of oil.
Northstar anticipates that the 1998 annual average daily production will be
similar to the first half average daily production.
Oil and NGLs sales decreased by $32.7 million as both volumes and prices
were down by 10% and 29%, respectively, from 1997. The volume decrease of 2,300
Bbls/d accounted for $5.6 million of the decrease, while the price decrease of
$6.54 per Bbl accounted for the additional $27.1 million revenue decrease.
Natural gas prices averaged $1.98 per Mcf in the first half of 1998,
resulting in an increase in gas sales of $4.9 million, or 7%. The gas price
includes a $7.3 million settlement payment received in the second quarter of
1998 on the termination of a long-term gas contract by a customer. Excluding
this settlement payment, natural gas prices would have averaged $1.78 per Mcf in
1998, representing a $0.14 per Mcf drop in the average price which would have
resulted in a reduction in revenues of $5.1 million. The lower natural gas price
in the first half of 1998 was primarily due to unusually mild winter
temperatures and high volumes of natural gas in storage which caused an
oversupply. This was partially offset by production increases in April 1997 in
northern Alberta as a result of the 1996-1997 winter drilling program and
production from additional interests acquired in the southern Alberta Foothills
area, which increased revenues by $2.7 million.
1997 vs 1996. A summary comparing 1997 production volumes, revenues and
prices to 1996 shows that decreases in volumes for both gas and oil and NGLs and
a drop in oil and NGLs prices more than offset a 19% increase in gas prices.
Consequently, revenues declined by 6%.
<TABLE>
<CAPTION>
YEARS ENDED
DECEMBER 31,
-------------------
1997 1996 % CHANGE
-------- ------- --------
<S> <C> <C> <C>
DAILY PRODUCTION
Gas (MMcf)........................................... 204 213 (4)
Oil and NGLs (Bbls).................................. 21,700 23,900 (9)
Total (Boe)(1)............................. 42,100 45,200 (7)
REVENUES ($ THOUSANDS)
Gas.................................................. $139,776 123,504 13
Oil and NGLs......................................... $173,499 210,624 (18)
Total...................................... $313,275 334,128 (6)
AVERAGE PRICES
Gas (per Mcf)........................................ $ 1.88 1.58 19
Oil and NGLs (per Bbl)............................... $ 21.89 24.18 (9)
Total (per Boe)............................ $ 20.38 20.22 1
</TABLE>
- ---------------
(1) Gas is converted to Boe at the rate of ten Mcf of gas to one Bbl of oil.
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Oil and NGLs production averaged 21,700 Bbls/d in 1997 compared to 23,900
Bbls/d in 1996. The decline in 1997 volumes compared to the production level for
1996 was due to property dispositions initiated by Morrison at the end of 1996.
The average price realized by Northstar amounted to $21.89 per Bbl, down from
$24.18 per Bbl in 1996. These prices are net of hedging losses of $0.12 per Bbl
in 1997 and $0.67 per Bbl in 1996.
Oil netbacks dropped to $13.04 per Bbl in 1997 from $14.67 per Bbl in 1996.
The decline was largely due to a weakening in the average price for West Texas
Intermediate crude, the benchmark industry price for crude oil in North America,
which dropped from U.S.$22.03 per Bbl in 1996 to U.S.$20.62 per Bbl in 1997. A
widening of quality differentials for heavier grades of crude oil also
contributed to the lower average Northstar price in 1997.
Natural gas volumes showed strong growth throughout 1997, increasing almost
20% from 181 MMcf/d in the first quarter to 212 MMcf/d in the fourth quarter.
However, when 1997 gas production is compared to 1996, new production which came
onstream in the Smoky Bear area in the second quarter of 1997 and production
increases in the Coleman area of the southern Alberta Foothills Region were more
than offset by reductions in production resulting from dispositions in late 1996
pursuant to the Morrison disposition program and natural production declines
from mature properties.
Natural gas prices increased by 19% to average $1.88 per Mcf in 1997,
resulting in higher netbacks of $1.33 per Mcf. The higher 1997 price reflected
strong demand in the first quarter, when Northstar received an average price of
$2.27 per Mcf due to unusually cold winter temperatures. Lower demand during the
summer months caused prices to experience a normal decline during the second and
third quarters. Northstar's hedging activities reduced the 1997 realized price
by $0.03 per Mcf, compared to a gain of $0.03 per Mcf in 1996.
Gross revenues before royalties decreased by $20.9 million to $313.3
million in 1997. Lower production volumes, largely attributable to the producing
property dispositions initiated by Morrison in late 1996, resulted in a revenue
reduction of $24.4 million. This was partially offset by commodity price
changes, which generated a $3.5 million increase in revenues. Stronger natural
gas prices added $23.4 million to revenues but this was substantially eroded by
a $19.9 million revenue reduction attributable to weaker oil and NGLs prices.
1996 vs 1995. A summary comparing 1996 production volumes, revenues and
prices to 1995 shows that the overall increase in revenues of 28% resulted from
higher production volumes and prices for both gas and oil and NGLs.
<TABLE>
<CAPTION>
YEARS ENDED
DECEMBER 31,
-------------------
1996 1995 % CHANGE
-------- ------- --------
<S> <C> <C> <C>
DAILY PRODUCTION
Gas (MMcf)........................................... 213 188 13
Oil and NGLs (Bbls).................................. 23,900 22,500 6
Total (Boe)(1)............................. 45,200 41,300 9
REVENUES ($ THOUSANDS)
Gas.................................................. $123,504 93,221 32
Oil and NGLs......................................... $210,624 167,898 25
Total...................................... $334,128 261,119 28
AVERAGE PRICES
Gas (per Mcf)........................................ $ 1.58 1.36 16
Oil and NGLs (per Bbl)............................... $ 24.18 20.47 18
Total (per Boe)(1)......................... $ 20.22 17.35 17
</TABLE>
- ---------------
(1) Gas is converted to Boe at the rate of ten Mcf of gas to one Bbl of oil.
Oil and NGLs production averaged 23,900 Bbls/d in 1996, up 6% from 22,500
Bbls/d in 1995 due to production added from Northstar's exploration and
development program. Oil netbacks increased from $12.24 per Bbl in 1995 to
$14.66 per Bbl in 1996 due to an increase in the West Texas Intermediate crude
price from
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U.S.$18.20 per Bbl in 1995 to U.S.$22.03 per Bbl in 1996, partially offset by
losses from hedging and higher royalties. The Canadian dollar price realized on
production averaged $24.18 per Bbl in 1996 compared to $20.47 per Bbl in 1995.
Natural gas production grew from 188 MMcf/d in 1995 to 213 MMcf/d in 1996
as a result of volumes added from Northstar's exploration and development
program. Average prices realized for natural gas production increased from $1.36
per Mcf in 1995 to $1.58 in 1996, resulting in a netback price of $1.10 per Mcf
compared to $1.01 per Mcf in 1995.
NET ROYALTIES
Royalty expense is payable based on production to landowners and to the
government in the case of public lands. Royalty rates are generally set with
respect to industry reference prices and generally increase or decrease with the
reference price.
June 30, 1998 vs June 30, 1997. Royalties dropped from $34.4 million in the
first half of 1997 to $19.2 million in the first half of 1998. The decreases
resulted from lower oil and gas sales and a decline in royalty rates from 22% in
the first half of 1997 to 15% in the first half of 1998. The decreased royalty
rate reflects the impact of the $7.3 million natural gas contract termination
settlement in 1998 and the impact of hedging revenues of $7.9 million in the
first half of 1998, compared to a hedging loss of $2.5 million in the first half
of 1997. In addition, the royalty rate decreased as a result of decreases in the
industry reference prices on which royalties are based.
1997 vs 1996. Royalties for 1997 decreased to $57.8 million from $63.1
million in 1996, reflecting lower revenues. In 1997, royalties represented 18%
of revenues, slightly lower than the 1996 computed rate of 19%. Oil and NGLs
royalties amounted to 20% of revenues in 1997 compared to 21% in 1996, while
natural gas royalties increased from 15% of revenues in 1996 to 16% in 1997. The
relatively minor increase in natural gas royalties when Northstar's average
price increased by 19% was due to a higher gas cost allowance attributable to
Northstar's investment in gas plants and related facilities. The gas cost
allowance is a credit available in Canada against royalties from natural gas
sales with respect to public lands, based on capital expenditures to improve
processing capacity.
1996 vs 1995. Royalties increased from $43.4 million in 1995 to $63.1
million in 1996 due to increased revenues from oil and gas sales. In 1996,
royalties represented 19% of oil and gas sales, up from 17% in 1995.
INTEREST AND OTHER INCOME
Interest and other income includes foreign exchange gains and losses,
overhead earned as operator of the Nevis gas plant and, prior to the disposal of
the assets, income from a crude oil pipeline and processing fees earned from the
Nevis gas plant.
Interest and other income is comprised of the following:
<TABLE>
<CAPTION>
SIX MONTHS ENDED YEARS ENDED
JUNE 30, DECEMBER 31,
----------------- ---------------------------------
1998 1997 1997 1996 1995
------- ------- ------------- ------- -------
($ THOUSANDS)
<S> <C> <C> <C> <C> <C>
Pipeline revenues................... $ -- $ -- $ -- $ 4,714 $ 4,357
Nevis processing fees............... -- -- -- 4,221 --
CGGS administration fees............ -- 79 79 1,636 1,614
Nevis operator overhead(1).......... 592 888 1,504 963 793
Management contract termination
fee............................... 4,000 -- -- -- --
Marketing revenues.................. -- -- -- (633) 178
Other, including interest and
foreign exchange.................. (388) 1,515 555 3,675 3,316
------ ------ ------ ------- -------
$4,204 $2,482 $2,138 $14,576 $10,258
====== ====== ====== ======= =======
</TABLE>
- ---------------
(1) Effective July 1, 1998, Northstar is no longer the operator of the Nevis gas
plant, and operator overhead payments will cease at that time.
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June 30, 1998 vs June 30, 1997. Interest and other income increased from
$2.5 million in the first half of 1997 to $4.2 million in 1998 due to the
collection in the second quarter of 1998 of a one-time termination fee in
respect of Northstar's former role as manager of the Morrison Facilities Income
Fund. Excluding this amount, interest and other income dropped by $2.3 million
as a result of a decline in Northstar's excess cash position following the April
1997 share buy back and an increase of $0.6 million to $0.7 million in the
amortization of deferred foreign exchange losses on long-term debt.
1997 vs 1996. Interest and other income dropped from $14.6 million for the
year ended December 31, 1996 to $2.1 million in 1997. The 1996 amount included
$8.9 million in income from the natural gas processing plant and crude oil
pipeline which were sold by Morrison in January 1997, together with fees earned
from services provided to CGGS. Interest income decreased substantially from
1996 to 1997 due to lower cash balances.
1996 vs 1995. Interest and other income increased from $10.3 million in
1995 to $14.6 million in 1996. The increase was primarily due to additional gas
processing income from the Nevis gas plant which was purchased in the fall of
1996 and sold effective January 1, 1997.
GAIN ON SALE OF ASSETS
As Northstar continued its announced intention of selling non-core and
non-strategic assets, in March 1998, Northstar recorded a gain of $40.1 million
on the sale of its investment in the West Windsor cogeneration plant for a
consideration of $72.3 million. In January 1997, Northstar recorded a one-time
gain of $40.7 million on the sale of its interest in the Nevis natural gas
processing plant and a crude oil pipeline for a net cash consideration of $178.8
million. In 1996, a gain of $14.5 million was recorded on the sale of the
investment in CGGS, a company previously managed by Morrison.
EQUITY EARNINGS
Prior to its disposal, effective January 1, 1998, Northstar accounted for
its 48% interest in the West Windsor cogeneration plant, and until June 30, 1998
accounted for its 22% interest in MMRL, under the equity method of accounting.
June 30, 1998 vs June 30, 1997. Equity earnings decreased from $4.0 million
in 1997 to zero in 1998 as the West Windsor cogeneration plant was sold
effective January 1, 1998 and the equity investment in MMRL showed no earnings
in the first half of 1998 and was sold effective June 30, 1998.
1997 vs 1996. Equity earnings increased slightly from $8.1 million in 1996
to $8.6 million in 1997.
1996 vs 1995. The increase in equity earnings from $1.9 million in 1995 to
$8.1 million in 1996 was due to a $3.0 million increase in earnings from the
West Windsor cogeneration plant, reflecting the first full year of operations in
1996 and a $3.2 million increase in equity earnings from the investment in MMRL.
The increase in MMRL's earnings was attributable to an increase in production
and profitability following an acquisition by MMRL, in 1995, of oil and gas
interests in the United Kingdom.
OPERATING EXPENSES
June 30, 1998 vs. June 30, 1997. Lease operating expenses increased by $4.5
million to $29.1 million from the first half of 1997 to the corresponding period
in 1998, leading to a 23% increase on a Boe basis. Of the increase, $1.3 million
related to third party audit adjustments of prior period operating expenses
which were not recoverable from other working interest owners of properties
operated by Northstar, and other adjustments in respect of prior periods. Costs
were up in most regions due to gas plant turnarounds completed in the second
quarter of 1998 and higher workover expenditures incurred to optimize production
from mature wells as well as an increase in rates charged by industry service
companies due to the high level of industry activity.
Lower third party processing revenues, which are offset against lease
operating expenses, also contributed to the higher level of operating expenses
in 1998. Northstar's increased natural gas production volumes in the
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first half of 1998 resulted in lower capacity available at Northstar owned
natural gas plants for the processing of third party volumes, contributing to
reduced third party processing revenues.
On a per unit basis, Northstar's operating costs were $0.33 per Mcf for
natural gas in its first half of 1998 compared to $0.19 per Mcf for the
comparative period in 1997, while oil and NGLs expenses were $4.73 per Bbl and
$4.44 per Bbl in 1998 and 1997, respectively, for a combined rate of $4.00 per
Boe in 1998 compared to $3.26 per Boe in 1997.
1997 vs 1996. Operating expenses declined to $53.3 million from $56.9
million in 1996, mainly as a result of lower production volumes. On a per unit
basis, Northstar's costs were $0.25 per Mcf for natural gas in both 1997 and
1996, while oil and NGLs expenses were $4.44 per Bbl compared with $4.37 per Bbl
in 1996 for a combined rate of $3.47 per Boe compared with $3.45 in 1996.
1996 vs 1995. Operating expenses increased from $47.9 million in 1995 to
$56.9 million in 1996 due to higher production volumes, the installation of high
volume pumps to optimize production and higher costs associated with the
expansion of facilities. On a Boe basis, operating costs increased from $3.17
per Boe in 1995 to $3.45 per Boe in 1996.
GENERAL AND ADMINISTRATIVE EXPENSES
General and administrative expenses are reduced by various management fees
earned, including and primarily management fees received from MMRL and CGGS.
Overhead fees earned by Northstar in its capacity as operator of oil and natural
gas wells and capital expenditure projects are also offset against general and
administrative expenses.
June 30, 1998 vs June 30, 1997. General and administrative expenses
totalled $6.9 million in the first half of 1998, a decrease of $0.3 million
compared to 1997, which equated to a 1% decrease per Boe. Personnel costs
decreased by $1.2 million and office costs decreased by $0.8 million as
efficiencies were realized following the business combination with Morrison.
Also, overhead recoveries which offset general and administrative expenses,
increased by $0.6 million due to higher levels of capital expenditures. These
gains were offset by a decrease in management fees from $3.0 million in 1997 to
$0.8 million in 1998.
1997 vs 1996. General and administrative expenses were $12.5 million, up
from $7.6 million in 1996. The increase reflects higher personnel and other
charges due to transitional costs prior to the business combination of Northstar
and Morrison, a reduction in overhead recoveries due to property dispositions
and a change in the composition of capital expenditures, and lower management
fees. The reduction in management fees was attributable to the sale of CGGS in
the fourth quarter of 1996 and the resulting termination of the related
management fee arrangement.
1996 vs 1995. General and administrative expenses declined from $9.0
million in 1995 to $7.6 million in 1996. The $1.4 million decline was due to an
increase of $2.0 million in management fees earned, offset by a $0.6 million
increase in gross expenses. The increase in management fees was due largely to
an increase in MMRL's cash flow, on which a significant component of the
management fees is based.
INTEREST EXPENSE
June 30, 1998 vs June 30, 1997. Interest expense increased by $6.4 million
to $15.6 million in the first half of 1998 as compared to 1997. This increase is
a result of the long-term debt increasing from $187 million at March 31, 1997 to
$443 million at June 30, 1998 primarily as a result of borrowings to fund the
$300 million Northstar share repurchase which occurred in April 1997.
1997 vs 1996. Interest expense was $27.3 million in 1997, up from $17.1
million for 1996. The increase was attributable to the higher average debt
balance carried by Northstar in the eight month period subsequent to the share
repurchase and a $4.0 million provision for a "make whole" payment required to
be paid in early 1998 on the repayment of U.S. dollar denominated debt.
1996 vs 1995. Interest on long-term debt increased from $12.4 million in
1995 to $17.1 million in 1996 due to new debt of U.S.$135.0 million taken out in
the second half of 1995.
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FOREIGN EXCHANGE LOSS
In 1997, Northstar charged to earnings a foreign exchange loss of $4.0
million, which had previously been deferred, arising out of the repayment of
U.S. dollar denominated debt in the first quarter of 1998. Other foreign
exchange gains and losses are included in interest and other income and have not
been material during the periods presented.
DEPLETION AND DEPRECIATION
June 30, 1998 vs June 30, 1997. Depletion, depreciation and site
reclamation expenses were $61.4 million for the first half of 1998, an increase
of $5.0 million from the first half of 1997. The higher depletion and
depreciation charge was due to a depletion and depreciation rate increase to
$8.44 per Boe from $7.48 per Boe, offset in part by lower production volumes.
The increase in the depletion and depreciation rate is attributable to higher
recent finding and development costs per Boe compared to historical finding and
development costs.
1997 vs 1996. Depletion, depreciation and site reclamation expenses dropped
slightly to $118.8 million in 1997 from $119.8 million in 1996. The decrease was
due to lower production volumes, partially offset by an increase in the
depletion and depreciation rate. The higher depletion and depreciation rate was
attributable to higher finding and development costs in 1997 and the
reclassification of reserves previously recognized by Morrison.
1996 vs 1995. Depletion and depreciation increased from $101.4 million in
1995 to $119.8 million. Of the increase, approximately $10.0 million was due to
higher production volumes and the remainder resulted from an increase in the
depletion and depreciation rate.
INCOME AND CAPITAL TAXES
Northstar is subject to combined Canadian federal and provincial income
taxes which have had an approximate rate of 44.6%. While Northstar is not
currently liable for income taxes, as it has available deductions in excess of
income, an appropriate deferred income tax provision is provided against income.
In addition, Northstar is subject to capital taxes in Canada on Northstar's debt
and equity. At December 31, 1997, Northstar had available income tax pools of
approximately $650 million. Income tax pools represent amounts available for
deduction against future income for Canadian income tax purposes. The amounts
arise from capital expenditures and are deductible at prescribed rates which
vary depending on the nature of the expenditure. The March 1998 sale of the West
Windsor cogeneration plant will reduce available income tax pools by
approximately $65 million in 1998 and by an additional $25 million in 1999.
June 30, 1998 vs June 30, 1997. Income and capital taxes amounted to 21% of
pre tax income for the first half of 1998 compared to 44% for the comparative
period in 1997. The lower effective rate in 1998 is a result of a capital gain
of approximately $120 million on the sale of Northstar's interest in the West
Windsor cogeneration plant, of which 25% is not taxable.
1997 vs 1996. The 1997 tax provision consisted of capital taxes of $2.8
million and deferred income taxes of $38.1 million, compared to $2.8 million and
$41.7 million, respectively, in 1996. Northstar's deferred income tax provision
as a percentage of earnings before tax increased in 1997 as a result of higher
non-deductible depletion, attributable to acquisitions completed in late 1996
with low tax pools, and a reduction in Crown or public lands royalties eligible
for the Alberta royalty tax credit following the March 1997 business combination
with Morrison.
1996 vs 1995. Capital taxes increased from $1.7 million in 1995 to $2.8
million in 1996 due to the increased capitalization of Northstar in 1996. Income
and capital taxes in 1996 amounted to 42% of pre tax earnings compared to 38% in
1995. The increase was due to a higher resource allowance claim in 1995 and an
increase in depletion on non-tax based assets in 1996.
CAPITAL EXPENDITURES
Northstar's capital expenditure program for 1998 includes plans for the
drilling of over 200 wells. Approximately 65% of the budget is expected to be
directed towards natural gas properties. Northstar's
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planned 1998 capital spending for exploration, development and acquisitions is
estimated at $215 million and is expected to be financed from cash flow,
supplemented by reinvestment of a portion of the proceeds received from
dispositions of non-core assets.
In the first six months of 1998, Northstar drilled 180 wells with a 73%
success rate. The program, which resulted in gross capital expenditures of
approximately $120 million ($45.3 million net of proceeds received from non-core
property dispositions) compared to expenditures of $122.8 million in the first
half of 1997, was concentrated in the winter-only access areas of northern
Alberta.
Total capital expenditures of $275.8 million for 1997 were up 42% from the
$193.7 million spent in 1996. The prior year expenditure total is net of
non-core asset dispositions of $81.9 million. Excluding the impact of these
dispositions, 1997 capital expenditures were comparable to 1996. Expenditures in
1995 amounted to $329.8 million. In 1997, Northstar participated in drilling 266
wells with a 69% success ratio. The focus of the capital program was in the
Smoky Bear area of northern Alberta and in the East Central, South and West
Central regions. Northstar also acquired additional interests in the north
Coleman producing field in the southern Alberta Foothills region.
Of the $275.8 million spent in 1997, $264.1 million represented resource
expenditures leading to net reserve additions of 223 Bcf of natural gas and 15.3
million Bbls of oil and NGLs, before production, on a proved and probable basis.
Finding and development costs for 1997, calculated on a proved plus probable
basis, were $7.01 per Boe for the year compared to $5.85 per Boe for 1996.
Northstar's five year average finding and development costs were $6.33 per Boe.
LIQUIDITY AND CAPITAL RESOURCES
Northstar is currently constrained in pursuing opportunities as a result of
reduced financial flexibility created through its highly-leveraged position.
Northstar's total debt, net of cash, increased from $322.0 million at the end of
1996 to $505.1 million at December 31, 1997 and, following the sale of the
investment in the West Windsor cogeneration plant, decreased to $478.2 million
at June 30, 1998. The increase in debt during 1997 was largely attributable to
the share repurchase program, as cash flow and the proceeds of asset
dispositions initiated by Morrison in December 1996 provided funds for
Northstar's capital expenditure program.
The share repurchase plan was completed in April 1997, shortly after the
business combination. At the time of the combination, Northstar's debt level in
relation to its total capitalization was significantly lower than its peer group
of companies. In connection with the business combination, Northstar undertook
to make an issuer bid to enable both former Morrison shareholders and Northstar
shareholders prior to the combination to have an equal opportunity to tender
their shares to the offer. A total of 20.7 million Northstar Common Shares were
repurchased at a price of $14.50 per share for an aggregate cost of $300.4
million, including expenses.
In order to finance the share repurchase and to provide an additional
source of funds for Northstar's capital expenditure program, Northstar arranged
a $300 million revolving term credit facility with a syndicate of Canadian banks
and a separate $60 million operating facility with a Canadian chartered bank.
Prior to arranging these facilities, Northstar had outstanding debt of U.S.$135
million under two separate senior note issues completed in 1995 at interest
rates of 7.03% on U.S.$60 million and 6.76% on U.S.$75 million.
Throughout 1997, Northstar actively marketed its 48% interest in the West
Windsor cogeneration plant in order to reduce debt and to enable it to focus
more attention on its core oil and gas business. On December 31, 1997, an
agreement in principle was reached to sell the cogeneration investment for $72.3
million and the disposition was completed in March 1998, resulting in a pre tax
gain of $40.1 million.
In the latter half of 1997, Northstar acquired additional working interests
in the Coleman gas field. These acquisitions increased Northstar's working
interest to 90% and, given the 100% interest already held in the Coleman gas
plant, represented a strategic move reflecting Northstar's fundamental business
philosophy of owning high working interests in its core areas of operation.
These and other key acquisitions increased Northstar's capital expenditure
program to $275.8 million in 1997.
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The delay in completing the sale of the West Windsor cogeneration plant and
the increase in Northstar's 1997 capital program, through its strategic
acquisition program, resulted in a higher level of debt at December 31, 1997
than Northstar believes is prudent to carry over the longer term. Although the
proceeds from the sale of the cogeneration plant were applied to Northstar's
long-term bank borrowings in March 1998, Northstar's intensive first quarter
drilling program in the winter-only accessible northern Alberta area caused
capital expenditures to exceed cash flow in the first half of 1998. However,
since it is expected that exploration and development expenditures for the
remainder of 1998 will be less than cash flow, long-term debt is expected to
decrease through the remaining half of the year.
In order to continue to reduce bank debt and to focus on its core oil and
gas business, Northstar has continued the process of marketing certain of its
non-core oil and gas properties and processing facilities. In the first half of
1998, non-core properties were sold for an aggregate consideration of
approximately $75 million.
In March 1998, Northstar completed a new unsecured long-term senior note
financing of U.S.$150 million. Proceeds under the notes, which bear interest at
6.79%, were used to repay the previously outstanding 7.03% senior notes in the
amount of U.S.$60 million and the remainder was applied to bank debt. A
provision of $8.6 million, including an anticipated "make whole" payment of $4.6
million included with interest expense, was recorded in 1997 in respect of
foreign exchange and other losses associated with the repayment of the 7.03%
senior notes.
At June 30, 1998, total debt was comprised of U.S.$150 million bearing
interest at 6.79% with a 10-year average life, U.S.$75 million bearing interest
at 6.76% with a five-year average life and the remainder in Canadian dollars
subject to short-term Canadian interest rates. Northstar currently has revolving
and operating credit facilities of $150 million, of which $125.0 million was
drawn at June 30, 1998.
At June 30, 1998, Northstar had working capital of $7.2 million. Northstar
had a working capital deficiency of $18.2 million at the end of 1997 due to the
inclusion of the West Windsor cogeneration investment in current assets at its
cost of $26.8 million, while $70.0 million of long-term debt, being the portion
of long-term debt repaid on the subsequent March 1998 sale of the investment,
was classified as a current liability. In connection with the sale of the
investment in the West Windsor cogeneration plant, Northstar received a
promissory note payable by the purchaser due in January 1999, in respect of a
portion of the proceeds. A short-term loan in the amount of $34.8 million,
representing the discounted value of the promissory note, was obtained from a
Canadian chartered bank and the proceeds were applied to Northstar's long-term
bank debt. The short-term bank loan will be repaid upon receipt of the proceeds
due under the promissory note in January 1999. At June 30, 1998, the promissory
note was classified in current assets and the short-term bank loan was
classified in current liabilities.
Northstar's other investments, including the cost of the investment in
MMRL, were classified as current assets at December 31, 1997 due to Northstar's
intention to sell these investments in 1998. In May 1998, Northstar reached an
agreement with MMRL to exchange the shares and options of MMRL held by Northstar
for MMRL's 50% interest in Mountain Energy which owns certain of MMRL's Canadian
oil and gas properties. The transaction closed on July 31, 1998 with a June 30,
1998 effective date. Accordingly, the investment in MMRL was reclassified as a
non-current asset at June 30, 1998. Under the terms of the agreement, Northstar
will no longer act as co-manager of MMRL and will not be entitled to earn
management fees with effect from June 1, 1998.
BUSINESS ENVIRONMENT AND RISKS
Northstar is in the business of exploring for, developing, producing and
marketing oil and natural gas and therefore is subject to numerous inherent
risks. Northstar also seeks to ensure that its capital expenditure program is
diversified, reflecting an appropriate balance between low and higher risk
projects and between oil and natural gas prospects in its core areas.
Northstar is subject to commodity price volatility as well as fluctuations
in foreign exchange and interest rates. While world oil prices were strong
throughout most of 1997 with West Texas Intermediate averaging
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U.S.$20.62 per Bbl for the year, the price dropped in the latter months of 1997,
averaging U.S.$18.35 per Bbl in December, and fell further to U.S.$15.04 in
March 1998 and averaged U.S.$13.67 in June 1998. Northstar does not expect
significant strengthening of crude oil prices in 1998, with demand expected to
remain weak due to the economic crisis in Asia, high inventory levels in North
America and the potential for supply to be increased if the current embargoes on
production from Iraq are relaxed.
Natural gas prices strengthened significantly during 1997 with the Alberta
reference price increasing by 20% from 1996. However, prices in November and
December 1997, traditionally strong months as demand increases for the winter
heating season, dropped significantly from the beginning of the year. High
natural gas volumes in storage at the start of the winter season and warmer than
normal winter temperatures have resulted in lower natural gas prices in 1998.
Management of Northstar believes that longer term prospect for Alberta natural
gas pricing is positive as new export pipeline capacity, expected to be in place
on November 1, 1998, should provide increased access to U.S. markets thereby
lessening deliverability differentials.
As crude oil sales and, to a lesser extent, natural gas sales are directly
or indirectly denominated in U.S. dollars, Northstar's revenue stream is also
exposed to fluctuations arising from changes in the foreign exchange rate.
During 1997 the value of the Canadian dollar averaged U.S.$0.722 compared to
U.S.$0.733 in 1996 and closed the year at U.S.$0.70.
In late 1996, the Alberta Energy and Utilities Board (the "AEUB") conducted
a hearing to address the concerns of companies holding oil sands leases. The
holders of oil sands leases contend that recovery of bitumen from the oil sands
leases may be impaired by the extraction of natural gas which overlies bitumen
deposits if recovery of the bitumen does not occur first. In March 1998, the
AEUB issued guidelines to the oil and gas industry which granted holders of oil
and gas leases the right to continue to produce gas in oil sands areas from
wells drilled and completed by July 1, 1998, subject to the resolution of any
concerns raised by holders of oil sands leases. After July 1, 1998, application
must be made to the AEUB before any recovery of either gas or bitumen in oil
sands areas is approved for a new well. Northstar estimates that approximately
10 MMcf/d, or 5%, of Northstar's current gas production could be curtailed or
shut-in by the AEUB as a result of applications currently in front of the AEUB
by bitumen producers claiming gas production is inhibiting their recovery of
bitumen. Such gas production represents approximately $2.6 million, or 4%, of
Northstar's cash flow for the first six month period of 1998.
At this point in time, Northstar cannot ascertain what impact on future
operations, if any, might result from the AEUB's directive. Northstar and a
large number of other gas producers are working with the AEUB to establish
future operating procedures to minimize long term adverse impacts to natural gas
and bitumen producers. See "Risk Factors -- Impact of Governmental Regulations."
FINANCIAL INSTRUMENTS AND COMMODITY CONTRACTS
Northstar may from time to time hedge some of its exposure to price and
foreign exchange fluctuations, generally through price and foreign exchange
swaps for future production periods. The Northstar Board has established limits
for both the amounts and terms of hedging instruments that management may
contract.
At June 30, 1998, Northstar had sold forward approximately 8,000 Bbls/d of
1998 crude oil and NGLs production, representing approximately 40% of the first
half of 1998 production levels. Approximately 7,000 Bbls/d have been sold at an
average price of U.S.$19.16 per Bbl and 1,000 Bbls/d have been sold at a price
of Cdn$24.13 per Bbl. An additional 500 Bbls/d of 1999 production has been sold
at an average price of U.S.$20.01 per Bbl. In addition, Northstar has sold call
options in respect of 12,500 Bbls/d of production during the period July to
December 1998. The options are exercisable by the holder at an average price of
U.S.$19.97 per Bbl.
Northstar has also sold forward approximately 33 MMcf/d of 1998 natural gas
production (representing approximately 16% of the first half of 1998 production
levels) at an average price of $1.75 per Mcf. Substantially all of this
production relates to periods ending on or before October 31, 1998. Production
sold forward in respect of subsequent years approximates 18 MMcf/d in 1999 and 4
MMcf/d in 2000 at $2.19 and $1.73 per Mcf, respectively. In addition, Northstar
has entered into indexed base swap arrangements in respect
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of 17 MMcf/d of 1998 natural gas production, 9 MMcf/d of 1999 production and 5
MMcf/d for the period January 1, 2000 to March 31, 2002 and has also sold call
options in respect of 25 MMcf/d of production during the period April to October
1998. The options are exercisable by the holder at an average price of $2.37 per
Mcf.
To reduce the exposure to exchange rate fluctuations on U.S. dollar
revenues, Northstar has entered into exchange rate contracts to sell U.S.$60
million during each of the years 1998 and 1999 at an average rate of U.S.$0.732
and US$0.726, respectively, and U.S.$30 million in 2000 at U.S.$0.727.
In addition to the financial instruments set out above, Northstar has also
entered into fixed price natural gas sales contracts for approximately 44.3
MMcf/d in 1998 at an average price of $1.91 per Mcf, 47.7 MMcf/d in 1999 at an
average price of $2.07 per Mcf, and 46.4 MMcf/d for the years 2000 to 2002 at
average prices between $2.25 and $2.33 per Mcf. Another 32 MMcf/d of natural gas
production has been sold under five to ten year contracts at an initial price of
$1.87 per Mcf, escalating at approximately 4% for the duration of the contracts.
The U.S.$150 million senior notes issued by Northstar in March 1998, of
which U.S.$60 million was used to repay U.S. dollar denominated debt, has
resulted in over two-thirds of Northstar's debt bearing fixed interest rates.
The debt denominated in U.S. dollars provides Northstar with a natural hedge
against the impact of exchange rate fluctuations on its product sales
denominated in U.S. dollars. Northstar has no interest rate hedges outstanding
at this time.
YEAR 2000 STATUS
The "Year 2000" issue presents anticipated computer related problems for
all organizations relying on computers for the conduct of their business and
also where an organization's business partners rely on computers. Many computer
network systems and embedded processors are unable to recognize a two-digit
designation for the year 2000. As a result, there is a risk that the computer
may erroneously recognize "00" as 1900 rather than 2000 which could result in
errors or system failures. Northstar uses computers extensively for the conduct
of its business as well as relying on embedded microchip devices for many of its
operations.
Northstar initiated its compliance efforts in November 1997. From
inception, senior management has taken an active role in Northstar's Year 2000
plans to ensure that the project receives the level of attention and resources
that are required. The initial focus of Northstar's Year 2000 efforts was on
information system related hardware and software in Northstar's head office
environment. By the second quarter of 1998, with the assistance of an
international consulting firm, Northstar had completed an inventory of its head
office system applications and began an assessment of the steps required to
provide for Year 2000 compliance.
In Northstar's head office, the core hardware is year 2000 compliant and
the remainder is expected to be compliant by March 1999. All of Northstar's
software is purchased from software developers and Northstar has contacted the
developers of its more significant applications to determine the status of
upgrades that will be Year 2000 compliant. Upgrades to Northstar's financial
based software are expected to be installed and tested in the spring of 1999 and
upgrades to other systems are expected to be installed and tested in subsequent
months. Based on discussions held with vendors, Northstar anticipates that it
will be able to successfully install and test the Year 2000 compliant upgrades
to its current hardware and software applications before the year 2000. Testing
plans are currently being developed, including integration issues related to
certain core software products.
At Northstar's field locations, the Year 2000 assessment has been expanded
to include a review of devices imbedded in equipment at its gas plants, oil
batteries and pipelines. An inventory of Northstar's computer-based devices has
been completed and an assessment of the implications of the Year 2000 on each
device will be completed in November 1998. Northstar is participating in a joint
effort with more than 30 other oil and gas companies, many of whom are business
partners, and a number of engineering firms to share information on the
assessment, replacement and testing of these devices. For higher risk
applications, Northstar has identified other industry partners, including those
involved in pipeline operations, marketing, banking and other industry services
to share information and ensure that Year 2000 issues receive a high priority.
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With the exception of costs of approximately $400,000 expected to be
incurred in field locations, Northstar does not anticipate that it will incur
significant incremental costs associated with Year 2000 compliance. Northstar
has maintenance contracts with substantially all of its system vendors. The fees
paid pursuant to the maintenance contracts provide Northstar with access to
updated versions of system applications upon their release by the vendors.
Consequently, while the review and testing of updated vendor products will
require a higher proportion of Northstar's current information systems personnel
time, the incremental costs associated with this project are not expected to be
significant.
While Northstar believes that it has minimized the risks of encountering
serious problems associated with the Year 2000 issue, there is still a risk that
some systems and processes which are not Year 2000 compliant will either not be
identified or will not be corrected before 2000. Additionally, there can be no
assurance that the Year 2000 issues of other entities will not have a material
impact on Northstar's systems or results of operations. Northstar has not yet
determined the most likely worst case scenario in the event that it or other
third parties fail to achieve Year 2000 compliance on a timely basis and a
contingency plan has not yet been developed. In Northstar's field locations the
safety of employees, the public and property are primary concerns. As part of
its Year 2000 contingency plan, Northstar intends to address communication
issues and emergency response procedures. Northstar will continue to monitor the
progress of vendors in the development of Year 2000 compliant versions of
software and intends to develop contingency plans in the event that suppliers of
critical applications fail to meet target dates for the release of appropriate
upgrades. Contingency plans are expected to include the identification and
installation of software products from alternative system vendors, although the
cost of purchasing and installing alternative software products, if required,
would be an incremental cost to Northstar's anticipated Year 2000 compliance
cost estimate.
INCOME TAX CONSIDERATIONS TO NORTHSTAR SHAREHOLDERS
AND OPTIONHOLDERS
CANADIAN FEDERAL INCOME TAX CONSIDERATIONS TO NORTHSTAR SHAREHOLDERS AND
OPTIONHOLDERS
In the respective opinions of Bennett Jones, Canadian counsel for
Northstar, and Burnet, Duckworth & Palmer, Canadian counsel for Devon,
(collectively "Counsel") the following are the material Canadian federal income
tax considerations under the Canadian Tax Act of the Arrangement that are
generally applicable to: (i) Northstar Shareholders who exchange their Northstar
Common Shares for Exchangeable Shares pursuant to the Arrangement and, for
purposes of the Canadian Tax Act, hold their Northstar Common Shares and will
hold their Exchangeable Shares and shares of Devon Common Stock as capital
property, deal at arm's length with Northstar and Devon and are not, and will at
all relevant times not be, affiliated with Northstar or Devon; and (ii)
Northstar Optionholders. This summary does not apply to: (i) a Northstar
Shareholder with respect to whom Devon is or will be a foreign affiliate within
the meaning of the Canadian Tax Act; (ii) a Northstar Shareholder who at any
time holds more than 10% of the issued and outstanding Northstar Common Shares;
(iii) a Northstar Shareholder which is a "financial institution" as defined in
the Canadian Tax Act for purposes of the "mark-to-market" rules; or (iv) a
Northstar Shareholder that is a specified financial institution as defined in
the Canadian Tax Act.
Northstar Common Shares will generally be considered to be capital property
to a shareholder unless held in the course of carrying on a business, in an
adventure in the nature of trade or as "mark-to-market" property for purposes of
the Canadian Tax Act. Northstar Shareholders should consult their own tax
advisors regarding whether, as a matter of fact, they hold their Northstar
Common Shares and will hold their Exchangeable Shares and shares of Devon Common
Stock as capital property for the purposes of the Canadian Tax Act. Northstar
Shareholders who are resident in Canada and whose Northstar Common Shares or
Exchangeable Shares might not otherwise qualify as capital property may be
entitled to have them treated as capital property by making the irrevocable
election provided by subsection 39(4) of the Canadian Tax Act. Northstar
Shareholders who do not hold their shares as capital property should consult
their own tax advisors regarding their particular circumstances and, in the case
of certain "financial institutions" (as defined in the Canadian Tax Act), the
potential application to them of the special "mark-to-market" rules in the
Canadian Tax Act.
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This opinion is based on the current provisions of the Canadian Tax Act,
the regulations thereunder, the Canada-United States Income Tax Convention,
1980, as amended (the "Tax Treaty"), and Counsels' understanding of the current
administrative practices published by Revenue Canada, Customs, Excise and
Taxation ("Revenue Canada"). This opinion takes into account specific proposals
to amend the Canadian Tax Act and regulations publicly announced by the Minister
of Finance prior to the date hereof (the "Tax Proposals") and assumes that all
Tax Proposals will be enacted in their present form. However, no assurances can
be given that the Tax Proposals will be enacted in the form proposed, or at all.
Except for the foregoing, this opinion does not take into account or anticipate
any changes in law, whether by judicial, administrative or legislative action or
decision, nor does it take into account provincial, territorial or foreign
income tax legislation or considerations, which may differ from the Canadian
federal income tax considerations described herein. No advance income tax ruling
has been obtained from Revenue Canada to confirm the tax consequences of any of
the transactions described herein.
NORTHSTAR SHAREHOLDERS AND NORTHSTAR OPTIONHOLDERS SHOULD CONSULT THEIR OWN
TAX ADVISORS WITH RESPECT TO THE TAX CONSEQUENCES OF THE TRANSACTIONS DESCRIBED
HEREIN IN THEIR PARTICULAR CIRCUMSTANCES.
In computing a Northstar Shareholder's or Northstar Optionholder's
liability for tax under the Canadian Tax Act, any cash amounts received in U.S.
dollars must be converted into the Canadian dollar equivalent, and the amount of
any non-cash consideration received must be expressed in Canadian dollars,
generally determined by reference to the fair market value at the time such
consideration is received.
Northstar Shareholders Resident in Canada
The following portion of the summary is applicable only to Northstar
Shareholders who, for purposes of the Canadian Tax Act and any relevant
bilateral tax treaty, are resident or deemed to be resident in Canada.
Exchange of Northstar Common Shares for Exchangeable Shares. This section
applies to a Northstar Shareholder who participates in the Arrangement and
exchanges all of the Northstar Common Shares that are owned by such holder at
the Effective Time for Exchangeable Shares pursuant to the Arrangement.
Northstar Shareholders who participate in the Arrangement will initially receive
Exchangeable Shares and ancillary benefits and rights.
On the exchange of Northstar Common Shares for Exchangeable Shares, a
Northstar Shareholder will be deemed:
(i) to have acquired the ancillary benefits and rights at a cost equal
to the fair market value thereof at the Effective Time;
(ii) to have acquired the Exchangeable Shares at an aggregate cost
equal to the amount, if any, by which the shareholder's adjusted cost base
of the Northstar Common Shares exceeds the cost to the holder of the
ancillary benefits and rights acquired on the exchange and the amount of
cash received in lieu of a fractional Exchangeable Share; and
(iii) to have disposed of Northstar Common Shares for aggregate
proceeds of disposition equal to the cost to the holder of the Exchangeable
Shares and the ancillary benefits and rights and the amount of cash
received in lieu of fractional Exchangeable Shares.
The taxation of capital gains is described below under "-- Taxation of Capital
Gain or Capital Loss" in respect of a redemption or exchange of Exchangeable
Shares.
For these purposes, a holder of Northstar Common Shares will be required to
determine the fair market value of the ancillary benefits and rights on a
reasonable basis for purposes of the Canadian Tax Act. Northstar is of the view
and has advised Counsel that the ancillary benefits and rights have only nominal
value. On this basis, a holder of Northstar Common Shares should not realize a
capital gain on the exchange of Northstar Common Shares for Exchangeable Shares.
Such determinations of value are not binding on
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Revenue Canada, however, and Counsel can express no opinion on matters of
factual determination such as valuations.
Call Rights. Northstar is of the view and has advised Counsel that the
Liquidation Call Right, the Redemption Call Right and the Retraction Call Right
have nominal value and that accordingly, no amount should be allocated to the
Call Rights. On this basis, a Northstar Shareholder should not realize a gain at
the time that any of such rights are granted to Devon. Such determinations of
value are not binding on Revenue Canada, however, and Counsel can express no
opinion on matters of factual determination such as valuations.
Dividends
Dividends on Exchangeable Shares. In the case of a Northstar Shareholder
who is an individual, dividends received or deemed to be received on the
Exchangeable Shares will be included in computing the Northstar Shareholder's
income and will be subject to the gross-up and dividend tax credit rules
normally applicable to taxable dividends received from taxable Canadian
corporations.
Subject to the discussion below as to the denial of the dividend deduction,
in the case of a Northstar Shareholder that is a corporation, dividends received
or deemed to be received on the Exchangeable Shares will be included in
computing the corporation's income and will normally be deductible in computing
its taxable income. A Northstar Shareholder that is a "private corporation" (as
defined in the Canadian Tax Act) or any other corporation resident in Canada and
controlled or deemed to be controlled directly or indirectly in any manner
whatsoever by or for the benefit of an individual (other than a trust) or a
related group of individuals (other than trusts) may be liable under Part IV of
the Canadian Tax Act to pay a refundable tax of 33 1/3% on dividends received or
deemed to be received on the Exchangeable Shares to the extent that such
dividends are deductible in computing the shareholder's taxable income.
If Devon or any other person with whom Devon does not deal at arm's length
is a specified financial institution under the Canadian Tax Act when a dividend
is paid on an Exchangeable Share, then, subject to the exemption described
below, dividends received or deemed to be received by a Northstar Shareholder
that is a corporation will not be deductible in computing taxable income, but
will be fully includable in computing income under Part I of the Canadian Tax
Act.
This denial of the dividend deduction for a corporate shareholder will not
apply if, at the time a dividend is received or deemed to be received, the
Exchangeable Shares are listed on a prescribed stock exchange in Canada (which
currently includes the TSE), Devon controls Northstar, and the recipient
(together with persons with whom the recipient does not deal at arm's length or
any partnership or trust of which the recipient or person is a member or
beneficiary, respectively) does not receive (and is not deemed to receive)
dividends in respect of more than 10% of the issued and outstanding Exchangeable
Shares.
A Northstar Shareholder that is a "Canadian-controlled private corporation"
(as defined in the Canadian Tax Act) may be liable to pay an additional
refundable tax of 6 2/3% on dividends or deemed dividends that are not
deductible in computing taxable income.
The Exchangeable Shares will be "taxable preferred shares" and "short-term
preferred shares" for purposes of the Canadian Tax Act. Accordingly, Northstar
will be subject to a 66 2/3% tax under Part VI.1 of the Canadian Tax Act on
dividends paid or deemed to be paid on the Exchangeable Shares and will be
entitled to deduct an amount equal to 9/4 of the tax payable in computing its
taxable income under Part I of the Canadian Tax Act. Dividends received or
deemed to be received on the Exchangeable Shares will not be subject to the 10%
tax under Part IV.1 of the Canadian Tax Act applicable to certain corporations.
Dividends on Devon Common Stock. Dividends on Devon Common Stock will be
included in the recipient's income for the purposes of the Canadian Tax Act.
Such dividends received by an individual will not be subject to the gross-up and
dividend tax credit rules in the Canadian Tax Act. A corporation that is a
shareholder will include such dividends in computing its income and generally
will not be entitled to deduct the amount of such dividends in computing its
taxable income. A Canadian-controlled private corporation may be liable to pay
an additional refundable tax of 6 2/3% on such dividends. United States
non-resident
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withholding tax on such dividends will be eligible for foreign tax credit or
deduction treatment where applicable under the Canadian Tax Act.
Redemption or Exchange of Exchangeable Shares. On the redemption (including
a retraction) of an Exchangeable Share by Northstar, the holder of an
Exchangeable Share will be deemed to have received a dividend equal to the
amount, if any, by which the redemption proceeds (the fair market value at the
time of the shares of Devon Common Stock received by the shareholder from
Northstar on the redemption plus the Dividend Amount, if any) exceeds the
paid-up capital (for purposes of the Canadian Tax Act) at that time of the
Exchangeable Share so redeemed. Immediately after the Effective Time, Northstar
has calculated that the paid-up capital of the Exchangeable Shares will be
approximately Cdn.$8.66 per share. The amount of any such deemed dividend will
be subject to the tax treatment accorded to dividends described above under
"-- Dividends -- Dividends on Exchangeable Shares." On the redemption, the
holder of an Exchangeable Share will also be considered to have disposed of the
Exchangeable Share for proceeds of disposition equal to the redemption proceeds
less the amount of any such deemed dividend. A holder will in general realize a
capital loss (or a capital gain) equal to the amount by which the adjusted cost
base to the holder of the Exchangeable Share exceeds (or is less than) such
proceeds of disposition. See "-- Taxation of Capital Gain or Capital Loss"
below. In the case of a shareholder that is a corporation, in some circumstances
the amount of any such deemed dividend may be treated as proceeds of disposition
and not as a dividend.
On the exchange of an Exchangeable Share by the holder thereof with Devon
for Devon Common Stock, the holder will in general realize a capital gain (or a
capital loss) equal to the amount by which the proceeds of disposition for the
Exchangeable Share exceed (or are less than) the adjusted cost base to the
holder of the Exchangeable Share. For these purposes, the proceeds of
disposition will be the fair market value of a share of Devon Common Stock at
the time of the exchange plus the Dividend Amount, if any, received by the
holder as part of the exchange consideration. See "-- Taxation of Capital Gain
or Capital Loss" below.
BECAUSE OF THE POTENTIALLY ADVERSE TAX CONSEQUENCES OF THE RECEIPT OF A
DEEMED DIVIDEND UPON THE REDEMPTION (INCLUDING A RETRACTION) OF AN EXCHANGEABLE
SHARE BY NORTHSTAR, HOLDERS OF EXCHANGEABLE SHARES SHOULD CONSULT WITH THEIR OWN
TAX ADVISORS CONCERNING THE POSSIBLE BENEFITS IN THEIR PARTICULAR CIRCUMSTANCES
OF EXCHANGING WITH DEVON FOR SHARES OF DEVON COMMON STOCK OR OTHERWISE DISPOSING
OF THEIR EXCHANGEABLE SHARES.
Taxation of Capital Gain or Capital Loss. Three-quarters of any capital
gain (the "taxable capital gain") realized on a retraction, redemption, exchange
or other disposition of Exchangeable Shares or disposition of Devon Common Stock
will be included in the Northstar Shareholder's income for the year of
disposition. Three-quarters of any capital loss so realized (the "allowable
capital loss") may be deducted by the holder against taxable capital gains for
the year of disposition. Any excess of allowable capital losses over taxable
capital gains of the Northstar Shareholder for the year of disposition may be
carried back up to three taxation years or forward indefinitely and deducted
against net taxable capital gains in those other years.
Capital gains realized by an individual or trust, other than certain
specified trusts, may give rise to alternative minimum tax under the Canadian
Tax Act. A Northstar Shareholder that is a Canadian-controlled private
corporation may be liable to pay an additional refundable tax of 6 2/3% on
taxable capital gains.
If the holder of an Exchangeable Share is a corporation, the amount of any
capital loss arising from a disposition or deemed disposition of an Exchangeable
Share may be reduced by the amount of dividends received or deemed to have been
received by it on such or on the Northstar Common Shares previously owned by
such holder, to the extent and under circumstances prescribed by the Canadian
Tax Act. Similar rules may apply where a corporation is a member of a
partnership or a beneficiary of a trust that owns Exchangeable Shares or where a
trust or partnership of which a corporation is a beneficiary or a member is a
member of a partnership or a beneficiary of a trust that owns Exchangeable
Shares.
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Acquisition and Disposition of Devon Common Stock. The cost of Devon Common
Stock received on the redemption (including a retraction) or exchange of an
Exchangeable Share will be equal to the fair market value of shares of Devon
Common Stock at the time of such event.
A disposition or deemed disposition of shares of Devon Common Stock by a
holder will generally result in a capital gain (or capital loss) equal to the
amount by which the proceeds of disposition, net of any reasonable costs of
disposition, exceed (or are less than) the adjusted cost base to the holder of
shares of Devon Common Stock.
Foreign Property Information Reporting. A holder of shares of Devon Common
Stock who is a "specified Canadian entity" for a taxation year or fiscal period
and whose total cost amount of "specified foreign property," including such
shares, at any time in the year or fiscal period exceeds Canadian $100,000 will
be required to file an information return for the year or period disclosing
prescribed information, including the holder's cost amount, any dividends
received in the year and any gains or losses realized in the year in respect of
such property. A specified Canadian entity means a taxpayer resident in Canada
in the year, other than a person exempt from tax under Part I of the Canadian
Tax Act, a non-resident-owned investment corporation, a mutual fund corporation,
a mutual fund trust and certain other trusts, corporations and partnerships.
Dissenting Shareholders. A dissenting Northstar Shareholder will be
considered to have realized a deemed dividend and capital gain (or capital loss)
based on proceeds equal to the fair value of the Northstar Common Shares held by
such holder determined as of the appropriate date, computed as generally
described above in the case of a redemption (including a retraction) of an
Exchangeable Share by Northstar for shares of Devon Common Stock under
"-- Redemption or Exchange of Exchangeable Shares." The amount of any such
deemed dividend received by an individual will be included in computing the
individual's income and will be subject to the gross-up and dividend tax credit
rules normally applicable to taxable dividends received from taxable Canadian
corporations. The amount of any such deemed dividend received by a corporation
(except to the extent that it may in some circumstances be treated as proceeds
of disposition and not as a dividend) will be included in computing its income,
will normally be deductible in computing its taxable income and may be subject
to tax under Part IV of the Canadian Tax Act if received by a private
corporation and certain other corporations as described under "-- Dividends
-- Dividends on Exchangeable Shares" above. A dissenting Northstar Shareholder
that is a Canadian-controlled private corporation may be liable to pay a
refundable tax of 6 2/3% on deemed dividends that are not deductible in
computing taxable income. Dissenting Northstar Shareholders should consult their
own tax advisors in respect of the treatment of such deemed dividends and
capital gains (or capital losses). Additional income tax considerations may be
relevant to dissenting Northstar Shareholders who fail to perfect or withdraw
their claims pursuant to the right of dissent.
Foreign Property. Provided that they are listed on a prescribed stock
exchange in Canada (which currently includes the TSE), the Exchangeable Shares
will not be foreign property under the Canadian Tax Act for trusts governed by
registered pension plans, registered retirement savings plans, registered
retirement income funds and deferred profit sharing plans or for certain other
tax-exempt persons. The Voting Rights and the Exchange Rights will be foreign
property under the Canadian Tax Act. However, as indicated above, Northstar is
of the view that the fair market value of these rights is nominal. Shares of
Devon Common Stock will be foreign property under the Canadian Tax Act.
Qualified Investments. Provided that they are listed on a prescribed stock
exchange in Canada (which currently includes the TSE), the Exchangeable Shares
will be qualified investments under the Canadian Tax Act for trusts governed by
registered retirement saving plans, registered retirement income funds and
deferred profit sharing plans. Devon Common Stock will be a qualified investment
under the Canadian Tax Act for such plans as long as such shares remain listed
on the AMEX (or are listed on certain other prescribed exchanges). The Voting
Rights and the Exchange Rights will not be qualified investments under the
Canadian Tax Act. However, as indicated above, Northstar is of the view that the
fair market value of these rights is nominal.
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Northstar Shareholders Not Resident in Canada
The following is applicable to holders of Northstar Common Shares who, for
purposes of the Canadian Tax Act, have not been and will not be resident or
deemed to be resident in Canada at any time during which they have held
Northstar Common Shares or will hold Exchangeable Shares or Devon Common Stock
and to whom such shares are not "taxable Canadian property" (as defined in the
Canadian Tax Act) and who do not use or hold and are not deemed to use or hold
such shares in connection with carrying on a business in Canada.
Generally, Northstar Common Shares, Exchangeable Shares and shares of Devon
Common Stock will not be taxable Canadian property provided that such shares are
listed on a prescribed stock exchange (which currently includes the TSE and the
AMEX), the holder does not use or hold, and is not deemed to use or hold, such
shares in connection with carrying on a business in Canada and the holder,
persons with whom the holder does not deal at arm's length, or the holder and
such persons, has not owned (or had under option) 25% or more of the issued
shares of any class or series of the capital stock of Northstar or Devon at any
time within five years preceding the date of disposition. Northstar has applied
for the listing of the Exchangeable Shares on the TSE, and Devon has indicated
that it intends to use its best efforts to cause Northstar to maintain such
listing. Devon has indicated that it will maintain the listing of the shares of
Devon Common Stock on the AMEX.
A holder of Northstar Common Shares will not be subject to tax under the
Canadian Tax Act on the exchange of Northstar Common Shares for Exchangeable
Shares, on the exchange of an Exchangeable Share for shares of Devon Common
Stock (except to the extent the exchange takes place by way of a redemption of
an Exchangeable Share) or on the sale or other disposition of an Exchangeable
Share or Devon Common Stock. A holder whose Exchangeable Shares are redeemed
(either under Northstar's redemption right or pursuant to the holder's
retraction rights) will be deemed to receive a dividend as described above for
shareholders resident in Canada under "-- Shareholders Resident in
Canada -- Redemption or Exchange of Exchangeable Shares." The amount of such
deemed dividend will be subject to the tax treatment accorded to dividends
described below.
Dividends paid or deemed to be paid on the Exchangeable Shares are subject
to nonresident withholding tax under the Canadian Tax Act at the rate of 25%,
although such rate may be reduced under the provisions of an applicable income
tax treaty. Under the Tax Treaty, the rate is generally reduced to 15% in
respect of dividends paid to a person who is the beneficial owner and who is
resident in the United States for purposes of the Tax Treaty.
A dissenting Northstar Shareholder will be considered to have realized a
deemed dividend computed as generally described above in the case of
shareholders resident in Canada. See Shareholders Resident in
Canada -- Dissenting Shareholders" above. The amount of any such deemed dividend
will be subject to the tax treatment accorded to dividends described immediately
above. Additional income tax considerations may be relevant to dissenting
Northstar Shareholders who fail to perfect or withdraw their claims pursuant to
the right of dissent.
Modification of Northstar Options
In the opinion of Counsel, the following is applicable to holders of
Northstar Options under which Northstar has agreed to issue Northstar Common
Shares and which holders: (i) participate in the Arrangement; (ii) are (for the
purposes of the Canadian Tax Act) resident or deemed to be resident in Canada;
(iii) were employees of Northstar (or of a corporation with which Northstar did
not deal at arm's length) at the time of receipt of such Northstar Options; (iv)
received such Northstar Options from Northstar by reason of employment; and (v)
were, at all relevant times, dealing at arm's length with Northstar and Devon.
Provided that Devon does not deal at arm's length with Northstar at the
time of the modification of the Northstar Options under the Arrangement, the
holder receives no consideration for a Northstar Option other than the modified
option and the value of the Northstar Option immediately after the modification
does not exceed the value immediately before such modification, the holder of a
Northstar Option will be deemed not
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to have disposed of the Northstar Option, and the modified option will be deemed
to be the same option as, and a continuation of, the Northstar Option. Provided
that the shares of Devon Common Stock constitute prescribed shares under section
6204 of the regulations under the Canadian Tax Act at all relevant times, the
same Canadian federal income tax considerations will apply on the disposition or
exercise of a modified option as would have applied on the disposition or
exercise of the Northstar Option prior to the Arrangement. Generally, Northstar
Common Shares will be prescribed shares under section 6204 of the regulations
under the Canadian Tax Act.
Holders of Northstar Options who exercise their rights of dissent, or who
are not resident and are not deemed to be resident in Canada, should consult
their own tax advisors concerning the income tax considerations relevant to
them.
UNITED STATES FEDERAL INCOME TAX CONSIDERATIONS TO NORTHSTAR SHAREHOLDERS
In the respective opinions of Skadden, Arps, Slate, Meagher & Flom LLP,
United States counsel to Devon, and Bogle & Gates P.L.L.C., United States
counsel to Northstar, the following are the material United States federal
income tax consequences generally applicable to holders of Northstar Common
Shares that are "United States persons" as defined for United States federal
income tax purposes and that hold Northstar Common Shares as capital assets
("United States Holders") with respect to the receipt and ownership of
Exchangeable Shares or shares of Devon Common Stock pursuant to the Arrangement.
For United States federal income tax purposes, "United States persons" are
United States citizens or residents, corporations or partnerships organized
under the laws of the United States or any state thereof, estates subject to
United States federal income tax on their income regardless of source and trusts
subject to the primary supervision of a court within the United States and
control of a United States fiduciary as described in Section 7701(a)(30) of the
U.S. Code.
This summary is based upon the U.S. Code, laws, regulations, rulings and
decisions in effect as of the date hereof, all of which are subject to change,
possibly with retroactive effect. No statutory, judicial, or administrative
authority exists which directly addresses certain of the United States federal
income tax consequences of the issuance and ownership of instruments and rights
comparable to the Exchangeable Shares, the Voting Rights, the Exchange Rights
and the Call Rights. Consequently (as discussed more fully below), some aspects
of the United States federal income tax treatment of the Arrangement, including
the receipt and ownership of Exchangeable Shares and the exchange of
Exchangeable Shares for shares of Devon Common Stock, are not certain. No
advance income tax ruling has been sought or obtained from the United States
Internal Revenue Service ("IRS") regarding the United States federal income tax
consequences of any of the transactions described herein.
This summary does not address aspects of United States taxation other than
United States federal income taxation, nor does it address all aspects of United
States federal income taxation that may be applicable to particular United
States Holders, including, without limitation, holders of Northstar Options and
holders of Northstar Common Shares acquired as a result of the exercise of
employee stock options and United States Holders that own, or have owned during
a five-year lookback period, 10% or more of the voting power of the voting stock
of Northstar. In addition, this summary does not address the United States state
or local tax consequences or the foreign tax consequences of the Arrangement or
the receipt and ownership of the Exchangeable Shares or shares of Devon Common
Stock.
UNITED STATES HOLDERS ARE STRONGLY URGED TO CONSULT THEIR TAX ADVISORS WITH
RESPECT TO THE UNITED STATES FEDERAL, STATE AND LOCAL TAX CONSEQUENCES AND THE
FOREIGN TAX CONSEQUENCES OF THE ARRANGEMENT, INCLUDING THE RECEIPT AND OWNERSHIP
OF EXCHANGEABLE SHARES, VOTING RIGHTS, EXCHANGE RIGHTS AND SHARES OF DEVON
COMMON STOCK.
Shareholders that are United States Holders
Characterization of the Arrangement for United States Federal Income Tax
Purposes. Skadden, Arps, Slate, Meagher & Flom LLP, United States counsel to
Devon, has delivered its opinion to Devon and Bogle &
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Gates P.L.L.C., United States counsel to Northstar, has delivered its opinion to
Northstar, each substantially to the effect that, although there is no direct
authority addressing the proper treatment of the Arrangement for United States
federal income tax purposes and, therefore, the treatment of the Arrangement is
not free from doubt, it is more likely than not that the Arrangement will
qualify as a "reorganization" within the meaning of Section 368(a) of the U.S.
Code with respect to United States Holders of Northstar Common Shares who
exchange their Northstar Common Shares for Exchangeable Shares pursuant to the
Arrangement. Since there is no direct authority addressing the proper treatment
of the Arrangement for United States federal income tax purposes, the treatment
of the Arrangement for United States federal income tax purposes is subject to
significant uncertainty. Accordingly, there can be no assurance that the IRS
will not challenge the status of the Arrangement as a reorganization or that, if
challenged, a court will not agree with the IRS. The foregoing opinions are
subject to certain customary assumptions, qualifications and representations, as
set forth therein.
Receipt of Exchangeable Shares. Assuming the Arrangement qualifies as a
reorganization under Section 368(a) of the U.S. Code, the following United
States federal income tax consequences should occur: (i) except as otherwise
provided below, a United States Holder of Northstar Common Shares who exchanges
Northstar Common Shares for Exchangeable Shares pursuant to the Arrangement
should not recognize any gain or loss with respect to the receipt of the
Exchangeable Shares; (ii) except as provided below, the aggregate tax basis of
the Exchangeable Shares received pursuant to the Arrangement by such United
States Holder of Northstar Common Shares should equal such holder's aggregate
tax basis in the Northstar Common Shares surrendered pursuant to the
Arrangement, reduced by the tax basis allocated to fractional share interests
for which cash is received; (iii) the holding period of the Exchangeable Shares
received by such United States Holder of Northstar Common Shares pursuant to the
Arrangement should include the holding period of the Northstar Common Shares
surrendered in exchange therefor; and (iv) cash payments in lieu of a fractional
Exchangeable Share will be treated as if a fractional Exchangeable Share had
been received in the Arrangement and then redeemed by Northstar. The redemption
should qualify as a distribution in full payment in exchange for the fractional
share rather than a distribution of a dividend. Accordingly, a Northstar
Shareholder receiving cash in lieu of a fractional share will recognize gain or
loss upon such payment equal to the difference, if any, between such
shareholder's tax basis in the fractional share (as described in clause (ii)
above) and the amount of cash received. The gain or loss will be capital gain or
loss if the Northstar Common Share is held as a capital asset at the Effective
Time. Under current law, the tax rate applicable to capital gains of an
individual taxpayer varies depending on the taxpayer's holding period for the
shares. In the case of an individual holder of Northstar Common Shares, any such
capital gain will be subject to a maximum United States federal income tax rate
of 20% if the individual held his or her Northstar Common Shares for more than
12 months at the Effective Time. The deductibility of capital losses is subject
to limitations for both individuals and corporations.
If the Arrangement fails to qualify as a reorganization, a United States
Holder of the Northstar Common Shares who exchanges Northstar Common Shares for
Exchangeable Shares pursuant to the Arrangement will recognize gain or loss on
the receipt of such Exchangeable Shares equal to the difference between the fair
market value of the consideration received (i.e., the Exchangeable Shares and
any cash payments in lieu of a fractional Exchangeable Share) and such holder's
tax basis in the Northstar Common Shares exchanged therefor; the United States
Holder's tax basis in such Exchangeable Shares will be their fair market value,
and the holding period will begin on the day after the Effective Time.
Voting Rights, Exchange Rights and Call Rights. Although the value of the
Voting Rights and Exchange Rights received and any Call Rights deemed to be
conveyed by Northstar Shareholders who receive Exchangeable Shares pursuant to
the Arrangement is uncertain, Northstar believes that such Voting Rights,
Exchange Rights and Call Rights will have only nominal value and, therefore,
their receipt or conveyance, as the case may be, will not result in any material
United States federal income tax consequences. Such determinations of value are
not binding on the IRS, however, and counsel can express no opinion on matters
of factual determinations, such as value. Further, the exchange of certain of
the Call Rights for the Voting Rights and Exchange Rights may not be taxable to
United States Holders because United States Holders and Devon may be deemed to
have granted purchase options to each other, which grants would not generally be
treated as taxable events for United States federal income tax purposes. It is
possible, however, that the Voting Rights,
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Exchange Rights and Call Rights have greater than nominal value and that the
transfer or receipt of the rights constitutes a taxable exchange. In such event,
the receipt of the Voting Rights and Exchange Rights and the conveyance of
certain of the Call Rights could generate taxable gain or loss.
If the Voting Rights and Exchange Rights have greater than nominal value
and those rights are deemed to have been transferred by Northstar rather than
Devon in redemption of Northstar Common Shares, a United States Holder will
recognize dividend income equal to the value of the rights to the extent of the
current and accumulated earnings and profits of Northstar (as determined under
United States federal income tax principles) unless such deemed redemption is
either "not essentially equivalent to a dividend" or "substantially
disproportionate," as such terms are defined in Section 302(b) of the U.S. Code.
If the deemed redemption is "substantially disproportionate" or "not essentially
equivalent to a dividend," any gain or loss recognized by a United States Holder
will be capital gain or loss if the Northstar Common Shares are held as a
capital asset at the Effective Time. The United States Holder's tax basis in the
Voting Rights and Exchange Rights received pursuant to the Arrangement will be
their respective fair market values at the Effective Time.
Requirement of Notice Filing. Any United States Holder that receives the
Exchangeable Shares in exchange for Northstar Common Shares will be required to
file a notice with the IRS on or before the last date for filing a United States
federal income tax return for the holder's taxable year in which the Arrangement
occurs. The notice must contain certain information specifically enumerated in
the United States Treasury Regulations promulgated under Section 367(b) of the
U.S. Code, and United States Holders are advised to consult their tax advisors
for assistance in preparing such notice.
If a United States Holder required to give notice as described above fails
to give the notice, and if such United States Holder further fails to establish
reasonable cause for the failure, then the IRS will be required to determine,
based on all the facts and circumstances, whether the exchange of Northstar
Common Shares for Exchangeable Shares is eligible for nonrecognition treatment.
In making this determination, the IRS may conclude that: (i) the exchange is
eligible for nonrecognition treatment, despite such noncompliance; (ii) the
exchange is eligible for nonrecognition treatment, provided that certain other
conditions imposed by the United States Treasury Regulations are satisfied; or
(iii) the exchange is not eligible for nonrecognition treatment and any gain
recognized will be taken into account for purposes of increasing the tax basis
of the Exchangeable Shares received pursuant to the Arrangement. Nevertheless,
the failure of any one United States Holder to satisfy the requirements should
not bar other United States Holders that do satisfy such requirements from
receiving nonrecognition treatment with respect to the exchange of their
Northstar Common Shares for Exchangeable Shares pursuant to the Arrangement.
Receipt of Devon Common Stock. A United States Holder of Northstar Common
Shares who elects to receive Devon Common Stock pursuant to the Arrangement
generally will recognize gain or loss on the receipt of the shares of Devon
Common Stock as if the shares of Devon Common Stock were received in exchange
for the Northstar Common Shares exchanged therefor. The gain or loss will be
equal to the difference between the fair market value of the shares of Devon
Common Stock at the time of the exchange and the United States Holder's tax
basis in the Northstar Common Shares exchanged therefor. The gain or loss will
be capital gain or loss if the Northstar Common Shares are held as capital
assets at the Effective Time. Under current law, the tax rate applicable to
capital gains of an individual taxpayer varies depending on the taxpayer's
holding period for the shares. In the case of an individual holder of Northstar
Common Shares, any such capital gain will be subject to a maximum United States
federal income tax rate of 20% if the individual held Northstar Common Shares
for more than 12 months at the time of the exchange. The deductibility of
capital losses is subject to limitations for both individuals and corporations.
Gain recognized on the exchange of Northstar Common Shares for shares of Devon
Common Stock generally will be treated as United States source gain. The United
States Holder's tax basis in the shares of Devon Common Stock will be the fair
market value of the shares of Devon Common Stock received by the United States
Holder in the exchange, and the holding period will begin on the day after the
exchange.
Exchange of Exchangeable Shares. It is anticipated that (subject to certain
exceptions described below) a United States Holder who exchanges the
Exchangeable Shares for shares of Devon Common Stock (including an exchange upon
the occurrence of an Automatic Redemption Date) generally will recognize gain
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or loss on the receipt of the shares of Devon Common Stock in exchange for such
Exchangeable Shares. The gain or loss will be equal to the difference between
the fair market value of the shares of Devon Common Stock at the time of the
exchange and the United States Holder's tax basis in the Exchangeable Shares
exchanged therefor. The gain or loss will be capital gain or loss, except that,
with respect to any Dividend Amount, ordinary income may be recognized by the
holder thereof. Under current law, the tax rate applicable to capital gains of
an individual taxpayer varies depending on the taxpayer's holding period for the
shares. In the case of an individual holder of Exchangeable Shares, any such
capital gain will be subject to a maximum United States federal income tax rate
of 20% if the individual held Exchangeable Shares for more than 12 months at the
time of the exchange. The deductibility of capital losses is subject to
limitations for both individuals and corporations. Gain recognized on the
exchange of Exchangeable Shares for shares of Devon Common Stock generally will
be treated as United States source gain. The United States Holder's tax basis in
the shares of Devon Common Stock will be the fair market value of the shares of
Devon Common Stock received by the United States Holder in the exchange, and the
holding period will begin on the day after the exchange.
In view of the likelihood of the recognition of gain or loss upon the
exchange of the Exchangeable Shares for shares of Devon Common Stock, United
States Holders may wish to consider delaying the exchange until such time as
they intend to dispose of the shares of Devon Common Stock receivable in
exchange for their Exchangeable Shares or (as discussed below) until such time
as Devon will own at least 80% of all of the then issued and outstanding
Exchangeable Shares either at the time of or as a result of the exchange.
Under certain limited circumstances, the exchange by a United States Holder
of Exchangeable Shares for shares of Devon Common Stock may be characterized as
a tax-free exchange. An exchange of Exchangeable Shares for shares of Devon
Common Stock generally may be characterized as a tax-free exchange if, at the
time of such exchange: (i) at least 80% of the then outstanding Exchangeable
Shares are held by Devon; and (ii) in such exchange, Devon, rather than
Northstar, acquires the Exchangeable Shares in exchange for shares of Devon
Common Stock pursuant to the exercise of its Call Rights. In any case, the
exchange would not be tax free unless certain other requirements are satisfied,
which, in turn, will depend upon facts and circumstances existing at the time of
the exchange and cannot be accurately predicted as of the date hereof. If such
exchange did qualify as a tax-free exchange, a United States Holder's tax basis
in the shares of Devon Common Stock received would be equal to such holder's tax
basis in the Exchangeable Shares exchanged therefor. The holding period of the
shares of Devon Common Stock received by the United States Holder should include
the holding period of the Exchangeable Shares exchanged therefor, which in turn,
should include the holding period of the Northstar Common Shares exchanged
pursuant to the Plan of Arrangement, provided that such Northstar Common Shares
and Exchangeable Shares have been held as capital assets immediately prior to
the Arrangement and the subsequent exchange, respectively.
Distributions on the Exchangeable Shares. While not free from doubt,
Northstar and Devon intend to treat dividends, if any, paid on the Exchangeable
Shares as dividends from Northstar, rather than from Devon. The following
discussion assumes that these dividends will be treated as dividends from
Northstar. A United States Holder of Exchangeable Shares generally will be
required to include in gross income as ordinary income dividends paid on the
Exchangeable Shares to the extent paid out of the earnings and profits of
Northstar, as determined under United States federal income tax principles.
These dividends generally will be treated as foreign source passive income for
foreign tax credit limitation purposes. Assuming eligibility for Tax Treaty
benefits, under the current Tax Treaty, the distributions will be subject to
Canadian withholding tax at a reduced rate of 15%. Subject to certain
limitations of United States federal income tax law, a United States Holder
generally should be entitled to credit this withholding tax against the holder's
United States federal income tax liability or to deduct the tax in computing
United States taxable income.
Dissenters. A United States Holder who exercises the right to dissent from
the Arrangement will recognize gain or loss on the exchange of the holder's
Northstar Common Shares for cash in an amount equal to the difference between
the amount of cash received and the holder's basis in the Northstar Common
Shares. The gain or loss will be capital gain or loss if the Northstar Common
Shares were held as capital assets at the Effective Time. Under current law, the
tax rate applicable to capital gains of an individual taxpayer varies depending
on the taxpayer's holding period for the shares. In the case of an individual
holder of
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Northstar Common Shares, any such capital gain will be subject to a maximum
United States federal income tax rate of 20% if the individual held Northstar
Common Shares for more than 12 months at the Effective Time. The deductibility
of capital losses is subject to limitations for both individuals and
corporations.
Passive Foreign Investment Company Considerations. For United States
federal income tax purposes, Northstar generally will be classified as a passive
foreign investment company (a "PFIC") for any taxable year during which either:
(i) 75% or more of its gross income is passive income (as defined for United
States federal income tax purposes); or (ii) on average for a taxable year, 50%
or more of its assets (by value) produce or are held for the production of
passive income. For purposes of applying the foregoing tests, Northstar's
proportionate share of the assets and gross income of corporations with respect
to which Northstar owns at least 25% of the stock (by value) will be attributed
to Northstar.
While there can be no assurance with respect to the classification of
Northstar as a PFIC, Northstar believes that it did not constitute a PFIC during
its taxable years ending prior to consummation of the Arrangement. At the
present time, Northstar and Devon intend to endeavor to cause Northstar to avoid
PFIC status in the future, although there can be no assurance that they will be
able to do so or that their intent will not change.
For purposes of applying the 50% asset test following the Arrangement,
Northstar's assets must be measured by their adjusted tax bases (as calculated
in order to compute earnings and profits for United States federal income tax
purposes) instead of by value, subject to certain adjustments. As a result, it
is possible that Northstar will be a PFIC for taxable years ending after the
Arrangement even though less than 50% of Northstar's assets (measured by the
fair market value of such assets) constitute passive assets. After the
Arrangement, Northstar intends to monitor its status regularly, and promptly
following the end of each taxable year Northstar will notify United States
Holders of Exchangeable Shares if it believes that Northstar was a PFIC for that
taxable year.
Although the matter is not free from doubt, if Northstar were a PFIC at any
time during a particular United States Holder's holding period for its Northstar
Common Shares, and the United States Holder had not made an election to treat
Northstar as a qualified electing fund (a "QEF") under Section 1295 of the U.S.
Code (a "QEF Election"), then the United States Holder might be required to
recognize gain upon the exchange of its Northstar Common Shares for Exchangeable
Shares. In the event that gain recognition is required, then: (i) the amount of
the gain would be equal to the excess of the fair market value of the Northstar
Common Shares over their adjusted tax bases; and (ii) any exchange of
Exchangeable Shares for shares of Devon Common Stock would be taxable under the
rules described below.
If Northstar is a PFIC following the Arrangement during a United States
Holder's holding period for the holder's Exchangeable Shares, and the United
States Holder does not make a QEF Election, then: (i) the United States Holder
will be required to allocate income recognized upon receiving certain excess
dividends with respect to, and gain recognized upon the disposition of, the
United States Holder's Exchangeable Shares (including upon the exchange of
Exchangeable Shares for shares of Devon Common Stock) ratably over the United
States Holder's holding period for the Exchangeable Shares; (ii) the amount
allocated to each year other than: (x) the year of the excess dividend payment
or disposition of the Exchangeable Shares; or (y) any year prior to the
beginning of the first taxable year of Northstar for which it was a PFIC, will
be subject to tax at the highest rate applicable to individuals or corporations,
as the case may be, for the taxable year to which such income is allocated, and
an interest charge will be imposed upon the resulting tax attributable to each
such year (which charge will accrue from the due date of the return for the
taxable year to which such tax was allocated); and (iii) amounts allocated to
periods described in (x) and (y) will be taxable to the United States Holder as
ordinary income.
If the United States Holder makes a QEF Election, then the United States
Holder generally will be currently taxable on the holder's pro rata share of
Northstar's ordinary earnings and net capital gains (at ordinary income and
capital gains rates, respectively) for each taxable year of Northstar in which
Northstar is classified as a PFIC, even if no dividend distributions are
received by the United States Holder, unless the United States Holder makes an
election to defer the taxes. If Northstar believes that it was a PFIC for a
taxable year, it will provide United States Holders of Exchangeable Shares with
information sufficient to allow
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eligible holders to make a QEF Election and report and pay any current or
deferred taxes due with respect to their pro rata shares of Northstar's ordinary
earnings and profits and net capital gains for the taxable year. United States
Holders should consult their tax advisors concerning the merits and mechanics of
making a QEF Election and other relevant tax considerations if Northstar is a
PFIC for any taxable year.
The foregoing summary of the possible application of the PFIC rules to
Northstar and the United States Holders of Northstar Common Shares is only a
summary of certain material aspects of those rules. Because the United States
federal income tax consequences to a United States Holder of Northstar Common
Shares under the PFIC provisions are significant, United States Holders of
Northstar Common Shares are urged to discuss those consequences with their tax
advisors.
Shareholders that are Not United States Holders
The following summary is applicable to holders of Northstar Common Shares
that are not United States Holders ("non-United States Holders").
A non-United States Holder generally will not be subject to United States
federal income tax on gain (if any) recognized on the receipt of the
Exchangeable Shares or shares of Devon Common Stock, on the sale or exchange of
the Northstar Common Shares or the Exchangeable Shares, or on the sale or
exchange of shares of Devon Common Stock, unless: (i) such gain is attributable
to an office or fixed place of business and is effectively connected with a
trade or business of the non-United States Holder in the United States, or, if a
tax treaty applies, is attributable to a permanent establishment maintained by
the non-United States Holder in the United States; or (ii) the non-United States
Holder is an individual who holds the Northstar Common Shares, the Exchangeable
Shares or the shares of Devon Common Stock, as the case may be, as capital
assets and is present in the United States for 183 days or more in the taxable
year of disposition, and certain other conditions are satisfied.
Northstar and Devon intend to treat dividends, if any, received by a
non-United States Holder with respect to the Exchangeable Shares as dividends
from Northstar rather than from Devon and as not subject to United States
withholding tax, and Northstar and Devon do not intend that Northstar or Devon
will withhold any amounts for tax from those dividends. There is some
possibility, however, that the IRS may assert that United States withholding tax
is payable with respect to any dividends paid on the Exchangeable Shares to
non-United States Holders. In such case, a non-United States Holder of
Exchangeable Shares could be subject to United States withholding tax at a rate
of 30%, which rate may be reduced by an applicable income tax treaty in effect
between the United States and the non-United States Holder's country of
residence (generally 15% on dividends paid to eligible residents of Canada under
the Tax Treaty).
Dividends received by non-United States Holders with respect to the shares
of Devon Common Stock generally will be subject to United States withholding tax
at a rate of 30%, which rate may be subject to reduction by an applicable income
tax treaty (generally 15% on dividends paid to eligible residents of Canada
under the Tax Treaty).
THE DISCUSSION OF UNITED STATES FEDERAL INCOME TAX CONSEQUENCES SET FORTH
ABOVE IS FOR GENERAL INFORMATION ONLY AND DOES NOT PURPORT TO BE A COMPLETE
ANALYSIS OR LISTING OF ALL POTENTIAL TAX EFFECTS THAT MAY APPLY TO A UNITED
STATES HOLDER OF NORTHSTAR COMMON SHARES. UNITED STATES HOLDERS OF NORTHSTAR
COMMON SHARES ARE STRONGLY URGED TO CONSULT THEIR OWN TAX ADVISORS TO DETERMINE
THE PARTICULAR TAX CONSEQUENCES TO THEM OF THE ARRANGEMENT, INCLUDING THE
APPLICATION AND EFFECT OF FEDERAL, STATE, LOCAL, FOREIGN AND OTHER TAX LAWS.
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COMPARISON OF STOCKHOLDER RIGHTS
In the event that the Combination is consummated, Northstar Shareholders
will, upon the Effective Time, have their Northstar Common Shares exchanged for
Exchangeable Shares. They will have certain rights to exchange or retract these
shares for an equivalent number of shares of Devon Common Stock. Devon is a
corporation organized under the OGCA. While the rights and privileges of
shareholders of an Alberta corporation are, in many instances, comparable to
those of stockholders of an Oklahoma corporation, there are certain differences.
These differences arise from differences between Oklahoma and Alberta law,
between the OGCA and ABCA and between the Devon Amended and Restated Certificate
and Devon Bylaws and the Northstar Articles and Northstar Bylaws. For a
description of the respective rights of the holders of shares of Devon Common
Stock and Northstar Common Shares, see "Devon Capital Stock" and "Northstar
Share Capital."
VOTE REQUIRED FOR EXTRAORDINARY TRANSACTIONS
The OGCA requires the affirmative vote of a majority of the outstanding
stock entitled to vote thereon to authorize any merger, consolidation,
dissolution or sale of substantially all of the assets of a corporation, except
that, unless required by its certificate of incorporation: (i) no authorizing
stockholder vote is required of a corporation surviving a merger if: (a) such
corporation's certificate of incorporation is not amended by the merger; (b)
each share of stock of such corporation will be an identical share of the
surviving corporation after the merger; and (c) the number of shares to be
issued in the merger does not exceed 20% of such corporation's outstanding
common stock immediately prior to the effective date of the merger; and (ii) no
authorizing stockholder vote is required of a corporation to authorize a merger
with or into a single direct or indirect wholly-owned subsidiary of such
corporation (provided certain other limited circumstances apply). The Devon
Amended and Restated Certificate does not require a greater percentage vote for
such actions. Stockholder approval is also not required under the OGCA for
mergers or consolidations in which a parent corporation merges or consolidates
with a subsidiary of which it owns at least 90% of the outstanding shares of
each class of stock.
Under the ABCA, certain extraordinary corporate actions, such as certain
amalgamations, continuances, and sales, leases or exchanges of all or
substantially all the property of a corporation other than in the ordinary
course of business, and other extraordinary corporate actions such as
liquidations, dissolutions and (if ordered by a court) arrangements, are
required to be approved by special resolution. A special resolution is a
resolution passed at a meeting by not less than two-thirds of the votes cast by
the shareholders, present in person or by proxy, at the meeting. In certain
cases, a special resolution to approve an extraordinary corporate action is also
required to be approved separately by the holders of a class or series of
shares.
AMENDMENT TO GOVERNING DOCUMENTS
The OGCA requires a vote of the corporation's board of directors followed
by the affirmative vote of a majority of the outstanding stock entitled to vote
for any amendment to the certificate of incorporation, unless a greater level of
approval is required by the certificate of incorporation. The Devon Amended and
Restated Certificate requires approval of at least 80% of the outstanding shares
entitled to vote for an amendment thereto in certain circumstances.
Additionally, if an amendment would have the effect of increasing or decreasing
the aggregate number of authorized shares of a particular class of stock,
increasing or decreasing the par value of the shares of such class or altering
the powers, preferences or special rights of a particular class of stock, the
class shall be given the power to vote as a class notwithstanding the absence of
any specifically enumerated power in the certificate of incorporation. The OGCA
also states that the power to adopt, amend or repeal the by-laws of a
corporation shall be in the stockholders entitled to vote, provided that the
corporation in its certificate of incorporation may also confer such power on
the corporation's board of directors. Devon's Amended and Restated Certificate
confers such power on the Devon Board.
Under the ABCA, any amendment to the articles generally requires approval
by special resolution, which is a resolution passed by a majority of not less
than two-thirds of the votes cast by shareholders entitled to vote on the
resolution. The ABCA provides that unless the articles, by-laws or any unanimous
shareholders
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agreement otherwise provide, the directors may, by resolution, make, amend or
repeal any by-laws that regulate the business or affairs of a corporation. Where
the directors make, amend or repeal a by-law, they are required under the ABCA
to submit the by-law, amendment or repeal to the shareholders at the next
meeting of shareholders, and the shareholders may confirm, reject or amend the
by-law, amendment or repeal by an ordinary resolution, which is a resolution
passed by a majority of the votes cast by shareholders entitled to vote on the
resolution.
DISSENTERS' RIGHTS
Under the OGCA, holders of shares of any class or series have the right, in
certain circumstances, to dissent from a merger or consolidation by demanding
payment in cash for their shares equal to the fair value (excluding any
appreciation or depreciation as a consequence or in expectation of the
transaction) of such shares, as determined by the district court in an action
timely brought by the corporation or the dissenters. The OGCA grants dissenters'
appraisal rights only in the case of mergers or consolidations and not in the
case of a purchase of assets for stock or, unless otherwise required by the
certificate of incorporation, a transfer of assets, regardless of the number of
shares being issued. Further, no appraisal rights are available for shares of
any class listed on a national securities exchange or held of record by more
than 2,000 stockholders, unless the agreement of merger or consolidation
converts such shares into anything other than: (i) stock of the surviving
corporation; (ii) stock of another corporation which is either listed on a
national securities exchange or held of record by more than 2,000 stockholders;
(iii) cash in lieu of fractional shares; or (iv) some combination of the above.
The ABCA provides that shareholders of an Alberta corporation entitled to
vote on certain matters are entitled to exercise dissent rights and to be paid
the fair value of their shares in connection therewith. The ABCA does not
distinguish for this purpose between listed and unlisted shares. Such matters
include: (i) any amalgamation with another corporation (other than with certain
affiliated corporations); (ii) an amendment to the corporation's articles to
add, change or remove any provisions restricting or constraining the issue or
transfer of shares of that class; (iii) an amendment to the corporation's
articles to add, change or remove any restrictions on the business or businesses
that the corporation may carry on; (iv) a continuance under the laws of another
jurisdiction; (v) a sale, lease or exchange of all or substantially all the
property of the corporation other than in the ordinary course of business; (vi)
a court order permitting a shareholder to dissent in connection with an
application to the court for an order approving an arrangement proposed by the
corporation; or (vii) certain amendments to the articles of a corporation which
require a separate class or series vote, provided that a shareholder is not
entitled to dissent if an amendment to the articles is effected by a court order
approving a reorganization or if an amendment to the articles is effected by a
court order made in connection with an action for an oppression remedy. Under
the ABCA, a shareholder may, in addition to exercising dissent rights, seek an
oppression remedy for any act or omission of a corporation or any of its
affiliates which is oppressive, unfairly prejudicial to or that unfairly
disregards a shareholder's interest.
OPPRESSION REMEDY
The ABCA provides an oppression remedy that enables the court to make any
order, both interim and final, to rectify the matters complained of, if the
court is satisfied upon application by a complainant (as defined below) that:
(i) any act or omission of the corporation or an affiliate effects a result;
(ii) the business or affairs of the corporation or an affiliate are or have been
carried on or conducted in a manner; or (iii) the powers of the directors of the
corporation or of an affiliate are or have been exercised in a manner that is
oppressive or unfairly prejudicial to or that unfairly disregards the interests
of any security holder, creditor, director or officer. A complainant includes:
(i) a present or former registered holder or beneficial owner of securities of a
corporation or any of its affiliates; (ii) a present or former director or
officer of the corporation or any of its affiliates; and (iii) any other person
who, in the discretion of the court, is a proper person to make such
application.
Because of the breadth of the conduct which can be complained of and the
scope of the court's remedial powers, the oppression remedy is very flexible and
is sometimes relied upon to safeguard the interests of shareholders and other
complainants with a substantial interest in the corporation. Under the ABCA, it
is not
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necessary to prove that the directors of a corporation acted in bad faith in
order to seek an oppression remedy. Furthermore, the court may order the
corporation to pay the interim expenses of a complainant seeking an oppression
remedy, but the complainant may be held accountable for such interim costs on
final disposition of the complaint. The OGGA does not provide for a similar
remedy.
DERIVATIVE ACTION
Derivative actions may be brought in Oklahoma by a stockholder on behalf
of, and for the benefit of, the corporation. The OGCA provides that a
stockholder must aver in the complaint that he or she was a stockholder of the
corporation at the time of the transaction of which he or she complains. A
stockholder may not sue derivatively unless he or she first makes demand on the
corporation that it bring suit and such demand has been refused, unless it is
shown that such demand would have been futile.
Under the ABCA, a complainant may apply to the court for leave to bring an
action in the name of and on behalf of a corporation or any of its subsidiaries,
or to intervene in an existing action to which any such body corporate or any
subsidiary is a party, for the purpose of prosecuting, defending or
discontinuing the action on behalf of the body corporate or subsidiary. Under
the ABCA, no action may be brought and no intervention in an action may be made
unless the complainant has given reasonable notice to the directors of the
corporation or its subsidiary of the complainant's intention to apply to the
court and the court is satisfied that: (i) the directors of the corporation or
its subsidiary will not bring, diligently prosecute or defend or discontinue the
action; (ii) the complainant is acting in good faith; and (iii) it appears to be
in the interests of the corporation or its subsidiary that the action be
brought, prosecuted, defended or discontinued.
Under the ABCA, the court in a derivative action may make any order it
thinks fit. Additionally, under the ABCA, a court may order a corporation or its
subsidiary to pay the complainant's reasonable legal fees.
DIRECTOR QUALIFICATIONS
At least half of the directors of an ABCA corporation generally must be
resident Canadians. The ABCA also requires that a corporation whose securities
are publicly traded must have not fewer than three directors, at least two of
whom are not officers or employees of the corporation or any of its affiliates.
The OGCA does not have comparable requirements.
FIDUCIARY DUTIES OF DIRECTORS
Directors of corporations incorporated or organized under the OGCA have
fiduciary obligations to the corporation and its stockholders. Pursuant to these
fiduciary obligations, the directors must act in accordance with the so-called
duties of "due care" and "loyalty." Under the OGCA, the duty of care requires
that the directors act in an informed and deliberative manner and inform
themselves, prior to making a business decision, of all material information
reasonably available to them. The duty of loyalty is the duty to act in good
faith in a manner which the directors reasonably believe to be in the best
interests of the stockholders. It requires that there be no conflict between
duty and self-interest.
Under the ABCA, the duty of care requires that the directors exercise the
care, diligence and skill that a reasonably prudent person would exercise in
comparable circumstances, and the duty of loyalty requires directors of an
Alberta corporation to act honestly and in good faith with a view to the best
interests of the corporation.
INDEMNIFICATION OF OFFICERS AND DIRECTORS
The OGCA and the Devon Amended and Restated Certificate provide that a
corporation may indemnify its present and former directors, officers, employees
and agents (each, an "indemnitee") against all reasonable expenses (including
attorneys' fees) and, except in actions initiated by or in the right of the
corporation, against all judgments, fines and amounts paid in settlement in
actions brought against them, if such individual acted in good faith and in a
manner which he or she reasonably believed to be in, or not opposed to, the best
interests of the corporation and, in the case of a criminal proceeding, had no
reasonable cause to believe his or
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her conduct was unlawful. The corporation shall indemnify an indemnitee to the
extent that he or she is successful on the merits or otherwise in the defense of
any claim, issue or matter associated with an action.
The OGCA allows for the advance payment of an indemnitee's expenses prior
to the final disposition of an action, provided that the indemnitee undertakes
to repay any such amount advanced if it is later determined that the indemnitee
is not entitled to indemnification with regard to the action for which the
expenses were advanced. Neither the ABCA nor the Northstar Bylaws expressly
provides for such advance payment.
Under the ABCA, except in respect of an action by or on behalf of a
corporation or to procure a judgment in its favor, a corporation may indemnify a
director or officer, a former director or officer or a person who acts or acted
at the corporation's request as a director or officer of a body corporate of
which the corporation is or was a shareholder or creditor, and his or her heirs
and legal representatives (an "Indemnifiable Person"), against all costs,
charges and expenses, including an amount paid to settle an action or satisfy a
judgment, reasonably incurred by him or her in respect of any civil, criminal or
administrative action or proceeding to which he or she is made a party by reason
of being or having been a director or officer of such corporation or such body
corporate, if: (i) he or she acted honestly and in good faith with a view to the
best interests of such corporation; and (ii) in the case of a criminal or
administrative action or proceeding that is enforced by a monetary penalty, he
or she had reasonable grounds for believing that his or her conduct was lawful.
An Indemnifiable Person is entitled to such indemnity from the corporation if he
or she was substantially successful on the merits in his or her defense of the
action or proceeding, fulfilled the conditions set out in (i) and (ii) above and
is fairly and reasonably entitled to indemnity. A corporation may, with the
approval of a court, also indemnify an Indemnifiable Person in respect of an
action by or on behalf of the corporation or body corporate to procure a
judgment in its favor, to which such person is made a party by reason of being
or having been a director or an officer of the corporation or body corporate
against all costs, charges and expenses reasonably incurred by him or her in
connection with the action, if he or she fulfills the conditions set out in (i)
and (ii) above. The Northstar Bylaws provide for indemnification of directors
and officers to the extent permitted by the ABCA.
DIRECTOR LIABILITY
The OGCA and the Devon Amended and Restated Certificate provide that the
charter of a corporation may include a provision which limits or eliminates the
liability of directors to the corporation or its stockholders for monetary
damages for breach of fiduciary duty as a director, provided such liability does
not arise from certain prescribed conduct, including: (i) acts or omissions not
in good faith or which involve intentional misconduct or a knowing violation of
law; (ii) the payment of dividends or redemption or purchase of stock in
violation of the OGCA; (iii) any breach of the duty of loyalty to Devon or its
stockholders; or (iv) any transaction from which the director derived an
improper personal benefit. The ABCA does not permit any such limitation of a
director's liability.
ANTI-TAKEOVER PROVISIONS AND INTERESTED STOCKHOLDER TRANSACTIONS
Devon's Amended and Restated Certificate of Incorporation has provisions
placing limitations on business combinations (including mergers, consolidations,
sales or other dispositions of assets having an aggregate value in excess of 10%
of the consolidated assets of Devon or the market value of all outstanding stock
of Devon) with a shareholder who is the beneficial owner of 15% or more of the
Devon Common Stock or any affiliate of such beneficial owner (an "interested
shareholder") for a period of three years from the date a person becomes an
interested shareholder, unless: (i) the business combination or the transaction
which resulted in the stockholder becoming an interested stockholder is approved
by the Devon Board prior to the date the interested stockholder acquired shares;
(ii) the interested stockholder acquired at least 85% of the voting stock of
Devon in the transaction in which it became an interested stockholder; or (iii)
the business combination is approved by a majority of the Devon Board and by the
affirmative vote of two-thirds of the votes entitled to be cast by disinterested
stockholders at an annual or special meeting. The effect of these provisions is
to limit unsolicited takeover attempts or certain transactions involving a
change of control. Devon
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has elected not to be governed by the provisions of Section 1090.3 of the OGCA,
which place similar limitations on business combinations with interested
shareholders.
The ABCA does not contain a comparable provision with respect to business
combinations. However, policies of certain Canadian securities regulatory
authorities, including Policy 9.1 of the Ontario Securities Commission ("Policy
9.1"), contain requirements in connection with related party transactions. A
related party transaction means, generally, any transaction by which an issuer,
directly or indirectly, acquires or transfers an asset or acquires or issues
treasury securities or assumes or transfers a liability from or to, as the case
may be, a related party by any means in any one or any combination of
transactions. "Related party" is defined in Policy 9.1 and includes directors,
senior officers and holders of at least 10% of the voting securities of the
issuer.
Policy 9.1 requires more detailed disclosure in the proxy material sent to
security holders in connection with a related party transaction, and, subject to
certain exceptions, the preparation of a formal valuation of the subject matter
of the related party transaction and any non-cash consideration offered therefor
and the inclusion of a summary of the valuation in the proxy material. Policy
9.1 also requires, subject to certain exceptions, that the minority shareholders
of the issuer separately approve the transaction, by either a simple majority or
two-thirds of the votes cast, depending on the circumstances.
SHARE RIGHTS PLAN
Under the Rights Agreement, holders of Devon Common Stock have one right
with respect to each share of Devon Common Stock held. The certificates
representing outstanding shares of Devon Common Stock also evidence one right
for each share. Currently, the rights trade with the shares of Devon Common
Stock. Upon the occurrence of certain events generally associated with an
unsolicited takeover attempt of Devon or certain transactions involving a change
of control, the rights will be distributed, will become exercisable and will be
tradable separately from the Devon Common Stock.
The rights have certain anti-takeover effects. They will cause substantial
dilution to a person or group that attempts to acquire Devon in a manner which
causes the rights to become exercisable. Devon believes, however, that the
rights should neither affect any prospective offeror willing to negotiate with
the Devon Board nor interfere with any merger or other business combination
approved by the Devon Board. The rights may be redeemed by the Devon Board for
$0.01 per right. The terms of the Rights Agreement may be amended by the Devon
Board without the consent of the holders of the Devon Common Stock or the
rights.
DISSENTING NORTHSTAR SHAREHOLDERS' AND NORTHSTAR OPTIONHOLDERS' RIGHTS
UNDER THE OGCA, DEVON STOCKHOLDERS WILL NOT HAVE APPRAISAL OR DISSENTER'S
RIGHTS RELATING TO THE COMBINATION.
THE FOLLOWING DESCRIPTION OF THE RIGHTS OF DISSENTING NORTHSTAR
SHAREHOLDERS AND NORTHSTAR OPTIONHOLDERS IS NOT A COMPREHENSIVE STATEMENT OF
PROCEDURES TO BE FOLLOWED BY A DISSENTING NORTHSTAR SHAREHOLDER OR NORTHSTAR
OPTIONHOLDER WHO SEEKS PAYMENT OF THE FAIR VALUE OF HIS NORTHSTAR COMMON SHARES
OR NORTHSTAR OPTIONS AND IS QUALIFIED IN ITS ENTIRETY BY THE REFERENCE TO THE
FULL TEXT OF THE INTERIM ORDER AND SECTION 184 OF THE ABCA WHICH ARE ATTACHED TO
THIS JOINT PROXY STATEMENT AS ANNEXES C AND K, RESPECTIVELY. A NORTHSTAR
SHAREHOLDER OR NORTHSTAR OPTIONHOLDER WHO INTENDS TO EXERCISE THE RIGHT OF
DISSENT AND APPRAISAL SHOULD CAREFULLY CONSIDER AND COMPLY WITH THE PROVISIONS
OF THAT SECTION, AS MODIFIED BY THE INTERIM ORDER, AND SHOULD SEEK LEGAL ADVICE.
FAILURE TO COMPLY WITH THE PROVISIONS OF THAT SECTION, AS MODIFIED BY THE
INTERIM ORDER, AND TO ADHERE TO THE PROCEDURES ESTABLISHED THEREIN, AS MODIFIED
BY THE INTERIM ORDER, MAY RESULT IN THE LOSS OF ALL RIGHTS THEREUNDER.
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The Court hearing the application for the Final Order has the discretion to
alter the rights of dissent described herein based on the evidence presented at
such hearing.
Under the Interim Order, a registered Northstar Shareholder or Northstar
Optionholder is entitled, in addition to any other right, to dissent and to be
paid by Northstar the fair value of the Northstar Common Shares or Northstar
Options held by the Northstar Shareholder or Northstar Optionholder in respect
of which the holder dissents, determined as of the close of business on the last
business day before the day on which the resolution from which he dissents was
adopted. A Northstar Shareholder or Northstar Optionholder may dissent only with
respect to all of the Northstar Shares or Northstar Options held by such
Northstar Shareholder or Northstar Optionholder or on behalf of any one
beneficial owner and registered in the dissenting Northstar Shareholder's or
Northstar Optionholder's name. The demand for appraisal must be executed by or
for the holder of record, fully and correctly, as such holder's name appears on
the holder's share certificates or options. If the shares are owned of record in
a fiduciary capacity, such as by a trustee, guardian or custodian, the demand
should be made in that capacity, and if the shares or options are owned of
record by more than one person, as in a joint tenancy or a tenancy in common,
the demand should be made by or for all owners of record. An authorized agent,
including one or more joint owners, may execute the demand for appraisal for a
holder of record; however, such agent must identify the record owner or owners
and expressly identify the record owner or owners, and expressly disclose in
such demand that the agent is acting as agent for the record owner or owners.
PERSONS WHO ARE BENEFICIAL OWNERS OF NORTHSTAR COMMON SHARES REGISTERED IN
THE NAME OF A BROKER, CUSTODIAN, NOMINEE OR OTHER INTERMEDIARY WHO WISH TO
DISSENT SHOULD BE AWARE THAT ONLY THE REGISTERED HOLDERS OF SUCH SHARES ARE
ENTITLED TO DISSENT. ACCORDINGLY, IF YOU ARE A BENEFICIAL OWNER OF NORTHSTAR
COMMON SHARES DESIRING TO EXERCISE YOUR RIGHT OF DISSENT, YOU MUST MAKE
ARRANGEMENTS FOR THE NORTHSTAR COMMON SHARES BENEFICIALLY OWNED BY YOU TO BE
REGISTERED IN YOUR NAME PRIOR TO THE TIME THE WRITTEN OBJECTION TO THE
ARRANGEMENT RESOLUTION IS REQUIRED TO BE RECEIVED BY NORTHSTAR OR,
ALTERNATIVELY, MAKE ARRANGEMENTS FOR THE REGISTERED HOLDER OF YOUR NORTHSTAR
COMMON SHARES TO DISSENT ON YOUR BEHALF.
A dissenting Northstar Shareholder or Northstar Optionholder must send to
Northstar a written objection to the Arrangement Resolution, which written
objection must be received by Northstar c/o CIBC Mellon Trust Company at 600,
333 - 7th Avenue, S.W., Calgary, Alberta, Canada T2P 2Z1, or the Chairman of the
Northstar Meeting before the commencement of the Northstar Meeting, and the
dissenting Northstar Shareholder or Northstar Optionholder must not have voted,
in person or by proxy, in favor of the Arrangement Resolution. An application
may be made to the Court to fix the fair value of the dissenting Northstar
Shareholder's Northstar Common Shares or Northstar Optionholder's Northstar
Options after the Effective Date. If an application to the Court is made by
either Northstar or a dissenting Northstar Shareholder or Northstar
Optionholder, Northstar must, unless the Court otherwise orders, send to each
dissenting Northstar Shareholder or Northstar Optionholder a written offer to
pay the holder an amount considered by the Northstar Board to be the fair value
of the Northstar Common Shares or Northstar Options. The offer, unless the Court
otherwise orders, will be sent to each dissenting Northstar Shareholder or
Northstar Optionholder at least 10 days before the date on which the application
is returnable, if Northstar is the applicant, or within 10 days after Northstar
is served with notice of the application, if a Northstar Shareholder or
Northstar Optionholder is the applicant. The offer will be made on the same
terms to each dissenting Northstar Shareholder or Northstar Optionholder and
will be accompanied by a statement showing how the fair value was determined.
Failure to vote against the Arrangement Resolution does not constitute a waiver
of dissent rights.
A dissenting Northstar Shareholder or Northstar Optionholder may make an
agreement with Northstar for the purchase of Northstar Common Shares or
Northstar Options in the amount of Northstar's offer (or otherwise) at any time
before the Court pronounces an order fixing the fair value of the Northstar
Common Shares or Northstar Options. A dissenting Northstar Shareholder or
Northstar Optionholder is not required to
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give security for costs in respect of an application and, except in special
circumstances, will not be required to pay the costs of the application or
appraisal. On the application, the Court will make an order fixing the fair
value of the Northstar Common Shares and Northstar Options of all dissenting
Northstar Shareholders or Northstar Optionholders who are parties to the
application, giving judgment in that amount against Northstar and in favor of
each of those dissenting Northstar Shareholders or Northstar Optionholders and
fixing the time within which Northstar must pay that amount payable to the
dissenting Northstar Shareholders or dissenting Northstar Optionholders. The
Court may in its discretion allow a reasonable rate of interest on the amount
payable to each dissenting Northstar Shareholder or Northstar Optionholder
calculated from the date on which the Northstar Shareholder or Northstar
Optionholder ceases to have any rights as a Northstar Shareholder or Northstar
Optionholder until the date of payment.
On the Arrangement becoming effective, or upon the making of an agreement
between Northstar and the dissenting Northstar Shareholder or Northstar
Optionholder as to the payment to be made by Northstar to the dissenting
Northstar Shareholder or Northstar Optionholder, or upon the pronouncement of a
Court order, whichever first occurs, the dissenting Northstar Shareholder or
Northstar Optionholder will cease to have any rights as a Northstar Shareholder
or Northstar Optionholder other than the right to be paid the fair value of the
Northstar Common Shares or Northstar Options in the amount agreed to between
Northstar and the dissenting Northstar Shareholder or dissenting Northstar
Optionholder or in the amount of the judgment, as the case may be. Until one of
these events occurs, the Northstar Shareholder or Northstar Optionholder may
withdraw their dissent, or Northstar may rescind the Arrangement Resolution and
in either event, the dissent and appraisal proceedings in respect of that
Northstar Shareholder or Northstar Optionholder will be discontinued.
THE COMBINATION AGREEMENT PROVIDES THAT IT IS A MUTUAL CONDITION TO THE
OBLIGATIONS OF NORTHSTAR AND DEVON TO COMPLETE THE COMBINATION THAT HOLDERS OF
NOT MORE THAN 10% OF THE ISSUED AND OUTSTANDING NORTHSTAR COMMON SHARES AND
NORTHSTAR OPTIONS IN THE AGGREGATE EXERCISE THEIR RIGHT OF DISSENT AS DESCRIBED
ABOVE.
PROPOSED CERTIFICATE AMENDMENT
The proposed Certificate Amendment, if approved and adopted by Devon
Stockholders, would result in an amendment to the Devon Certificate of
Incorporation, as amended, which would: (i) designate a class of stock as
Special Voting Stock consisting of one share; and (ii) make conforming changes
to accommodate such Special Voting Stock. Approval by the Devon Stockholders of
the Certificate Amendment is a condition to the closing of the Combination, and
without such approval, the Combination Agreement cannot be consummated. A copy
of the Devon Amended and Restated Certificate, which includes the amendment
described above, is attached hereto as Annex D, and the following discussion is
qualified in its entirety by reference to such annex.
The Devon Board has approved the authorization of the Special Voting Stock
in order to establish a mechanism through which the holders of Exchangeable
Shares may exercise the voting rights attached to such shares. Although the
Exchangeable Shares will be considered shares of Northstar under the laws of the
Province of Alberta and any relevant federal Canadian law, the Exchangeable
Shares are structured to have the same economic and voting rights as the Devon
Common Stock, and at the option of the holder will be exchangeable at any time
on a one-for-one basis for Devon Common Stock. See "The Combination --
Combination Mechanics and Description of Exchangeable Shares." The use of
Exchangeable Shares is intended to allow shareholders of Northstar to receive
the combination consideration on a "tax-deferred" basis. See "Income Tax
Considerations to Northstar Shareholders and Optionholders."
THE DEVON BOARD RECOMMENDS THAT YOU VOTE "FOR" APPROVAL AND ADOPTION OF THE
CERTIFICATE AMENDMENT.
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PROPOSED OPTION PLAN AMENDMENT
GENERAL
After the Combination, Devon will have more than doubled its employees. In
order to permit Devon to have sufficient stock options available for future
grants to employees and directors, it is proposed that the Devon Stockholders
approve an amendment to the Devon Stock Option Plan to increase the number of
shares available for grant from two million to three million.
On March 26, 1997, the Devon Board, subject to Devon Stockholder approval,
adopted the Devon Stock Option Plan which authorized Devon, through the
Compensation and Stock Option Committee of the Devon Board (the "Committee") to
grant stock options to employees and directors of Devon or any Subsidiary
("Participants"). The Devon Board originally reserved 2,000,000 shares of Devon
Common Stock for grant to Participants designated by the Committee under the
Devon Stock Option Plan, and the Devon Stock Option Plan was approved by the
Devon Stockholders on May 21, 1997. On June 26, 1998, the Devon Board, subject
to Devon Stockholders approval, reserved an additional one million shares of
Devon Common Stock for grant to Participants designated by the Committee under
the Devon Stock Option Plan. As of October 27, a total of 328,500 options to
purchase Devon Common Stock have been granted under the Devon Stock Option Plan.
A description of the Devon Stock Option Plan appears below. The description
contained herein is qualified in its entirety by reference to the complete text
of the Devon Stock Option Plan.
BACKGROUND
The purpose of the Devon Stock Option Plan is to create incentives that are
designed to motivate employees and directors of Devon to put forth maximum
efforts toward the success and growth of Devon and to enable Devon to attract
and retain experienced individuals who by their position, ability and diligence
are able to make important contributions to Devon's success. Toward these
objectives, the Devon Stock Option Plan provides for the granting of stock
options.
ADMINISTRATION
The Devon Stock Option Plan is administered by the Committee. Among the
powers granted to the Committee are the powers to interpret the Devon Stock
Option Plan, establish rules and regulations for its operation, select employees
of Devon and its subsidiaries to receive awards and determine the timing, form,
amount and other terms and conditions pertaining to employee awards. The
Committee may also select nonemployee directors of Devon to receive awards and
determine the vesting schedule of such awards. However, such awards may only be
made at the times and up to the amounts specified in the Devon Stock Option
Plan. (See "-- Stock Option Awards to Nonemployee Directors" below.)
ELIGIBILITY FOR PARTICIPATION
Any employee of Devon or its Subsidiaries and any nonemployee director of
Devon is eligible to participate in the Devon Stock Option Plan. The selection
of Participants from among employees and directors is within the discretion of
the Committee.
TYPES OF AWARDS
The Devon Stock Option Plan provides for the granting of both stock options
intended to qualify as "incentive stock options" under Section 422 of the U.S.
Code ("ISOs") and nonqualified stock options that do not qualify as ISOs
("NQOs"). Awards of either ISOs or NQOs may be granted to employees. Nonemployee
directors may be granted only NQOs.
OTHER COMPONENTS OF THE DEVON STOCK OPTION PLAN
The Devon Stock Option Plan authorizes the Committee to grant awards during
the period beginning March 26, 1997 and ending March 25, 2007. Two million
shares of Devon Common Stock have been reserved for issuance (and an additional
one million will be reserved for issuance if the Option Plan Amendment is
166
<PAGE> 173
approved and adopted) subject to awards under the Devon Stock Option Plan.
Shares of Devon Common Stock reserved for option awards that terminate by
expiration, forfeiture, cancellation or otherwise without the issuance of shares
will again be available for grant under the Devon Stock Option Plan.
STOCK OPTION AWARDS TO EMPLOYEES
Under the Devon Stock Option Plan, the Committee may grant awards to
employees in the form of options to purchase shares of Devon Common Stock. The
Committee will, with regard to each option, determine the terms and conditions
of such option, the number of shares subject to the option and the manner and
time of the option's exercise. The exercise price of an option may not be less
than the fair market value of the Devon Common Stock on the date of grant. The
exercise price of an option may be paid by a Participant in cash, shares of
Devon Common Stock or a combination thereof. Subject to the adjustment
provisions of the Devon Stock Option Plan, the aggregate number of shares of
Devon Common Stock made subject to the award of options to any Participant in
any year may not exceed 50,000.
STOCK OPTION AWARDS TO NONEMPLOYEE DIRECTORS
The Devon Stock Option Plan provides for the grant of NQOs to nonemployee
directors. Such directors are eligible to receive stock option grants of up to
3,000 shares of Devon Common Stock immediately after each annual meeting of
Devon Stockholders at an exercise price equal to the fair market value of the
Devon Common Stock on that date. Any unexercised options will expire ten years
after the date of grant.
The Committee may elect to grant awards that are less than the maximum
share amount specified in the Devon Stock Option Plan and may determine the
vesting schedule for such grants. However, the Committee will have no other
discretion regarding awards to nonemployee directors.
ADJUSTMENTS
The total number of shares of the Devon Common Stock which may be purchased
through options under the Devon Stock Option Plan and the number of shares
subject to outstanding options and the related option process will be adjusted
in the case of changes in capital structure, resulting from any
recapitalization, stock split, stock dividend or similar transaction.
CHANGE OF CONTROL
In the case of a "Corporate Event" as defined in the Devon Stock Option
Plan, all NQOs and ISOs will become automatically fully vested and immediately
exercisable, with such acceleration to occur without the requirement of any
further act by Devon or the Participant. For the definition of Corporate Event,
see Article IX of the Devon Stock Option Plan. In the case of either a "Change
of Control Date" or an "Acquisition Date" options may become automatically
vested and fully exercisable, provided the Committee makes such provision in the
grant of the award. See Sections 2.1 and 2.6 of Article II of the Devon Stock
Option Plan for definitions of Acquisition Date and Change of Control Date,
respectively.
TERMINATION AND AMENDMENT
The Devon Stock Option Plan terminates as of midnight, March 25, 2007, but
prior thereto may be suspended or terminated by the Devon Board. In addition,
the Devon Board may, from time to time, amend the Devon Stock Option Plan in any
manner, but not without Devon Stockholder approval of any amendment which would
increase the number of shares of Devon Common Stock available under the Devon
Stock Option Plan or decrease the exercise price to less than the fair market
value of the Devon Common Stock on the date of grant. Any other amendment to the
Devon Stock Option Plan would also require shareholder approval if, in the
opinion of counsel to Devon, such approval is required by any federal or state
law, rule or regulation.
167
<PAGE> 174
U.S. FEDERAL TAX TREATMENT
Under current U.S. federal tax law, the following are the U.S. federal tax
consequences generally arising with respect to awards under the Devon Stock
Option Plan. A Participant who is granted an ISO does not realize regular
taxable income at the time of the grant or at the time of exercise, but only at
the time of disposition of the shares. The Participant does, however, realize
alternative minimum taxable income at the time of exercise equal to the
difference between the exercise price and the market value of the shares on the
date of exercise. Devon is not entitled to any deduction at the time of grant or
at the time of exercise. However, if the Participant makes no disposition of the
shares acquired pursuant to an ISO before the later of two years from the date
of grant or one year from the date the option is exercised, any gain or loss
realized on a subsequent disposition of the shares will be treated as a
long-term capital gain or loss. Under such circumstances, Devon will not be
entitled to any deduction for federal income tax purposes. If the Participant
makes a disposition prior to such times, Devon is entitled to a deduction equal
to the value of such shares.
The Participant who is granted a NQO does not have taxable income at the
time of grant, but does have taxable income at the time of exercise equal to the
difference between the exercise price of the shares and the market value of the
shares on the date of exercise. Devon is entitled to a corresponding deduction
for the same amount.
U.S. WITHHOLDING TAXES
Devon will have the right to require a Participant to remit to Devon, in
cash, an amount sufficient to satisfy federal, state and local withholding
requirements, if any, prior to the delivery of any certificate for shares of
Devon Common Stock acquired pursuant to the exercise of the options.
Notwithstanding the foregoing, a Participant may tender to Devon a number of
shares of Devon Common Stock or Devon may withhold a number of shares of Devon
Common Stock the fair market value of which will satisfy the U.S. federal and
state tax requirements.
THE DEVON BOARD RECOMMENDS A VOTE "FOR" THE PROPOSAL TO APPROVE THE
AMENDMENT TO THE DEVON STOCK OPTION PLAN TO INCREASE THE NUMBER OF SHARES
AVAILABLE FOR GRANT FROM TWO MILLION TO THREE MILLION SHARES.
AUDITORS, TRANSFER AGENT AND REGISTRAR
The independent chartered accountants of Northstar are Deloitte & Touche.
The independent auditors of Devon are KPMG Peat Marwick LLP. In the event that
the Combination is completed, the Devon Board will consider the appointment of
one independent auditor for the combined company.
Boston EquiServe, Client Administration, Mail Stop 45-02-62, P.O. Box 1865,
Boston, MA 02105-1865, is transfer agent and registrar for the Devon Common
Stock. The transfer agent for Northstar Common Shares is CIBC Mellon Trust
Company at 600, 333-7th Ave. S.W., Calgary, Alberta T2P 2Z1. Concurrently with
the Closing, CIBC Mellon Trust Company will be appointed as transfer agent and
registrar for the Exchangeable Shares. CIBC Mellon Trust Company will also be
Trustee under the Voting and Exchange Trust Agreement and Canadian co-registrar
for the Devon Common Stock.
LEGAL MATTERS
Certain legal matters in connection with the Combination will be passed
upon, on behalf of Northstar, by Bogle & Gates P.L.L.C., as to matters of U.S.
law, and Bennett Jones, as to matters of Canadian law, and, on behalf of Devon,
by Skadden, Arps, Slate, Meagher & Flom LLP and McAfee & Taft A Professional
Corporation, both as to matters of U.S. law, and by Burnet, Duckworth & Palmer,
as to matters of Canadian law.
168
<PAGE> 175
EXPERTS
The consolidated financial statements of Devon as of and for the years
ended December 31, 1997, 1996 and 1995 have been incorporated by reference
herein in reliance upon the report of KPMG Peat Marwick LLP, independent
certified public accountants, incorporated by reference herein, and upon the
authority of said firm as experts in accounting and auditing.
The consolidated financial statements of Northstar at December 31, 1997 and
1996, and for each of the three years in the period ended December 31, 1997
included herein have been audited by Deloitte & Touche, chartered accountants,
as set forth in their reports included herein, and are included herein in
reliance upon the authority of said firm as experts in accounting and auditing.
By Order of the Board of Directors
of Devon Energy Corporation
Marian J. Moon
Corporate Secretary
November 6, 1998
Oklahoma City, Oklahoma
169
<PAGE> 176
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
DEVON ENERGY CORPORATION AND SUBSIDIARIES:
For Devon's consolidated financial statements as of December 31, 1997, 1996
and 1995 and for the years then ended, and the independent auditors' report
thereon, refer to Devon's Annual Report on Form 10-K for the year ended December
31, 1997, a copy of which is included herewith.
For Devon's unaudited consolidated financial statements as of June 30, 1998
and for the six month periods ended June 30, 1998 and 1997, refer to Devon's
Quarterly Report on Form 10-Q for the quarter ended June 30, 1998, a copy of
which is included herewith.
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
NORTHSTAR ENERGY CORPORATION AND SUBSIDIARIES:
Auditors' Report to the Shareholders...................... FS-2
Consolidated Balance Sheets............................... FS-3
Consolidated Statements of Earnings....................... FS-4
Consolidated Statements of Retained Earnings.............. FS-5
Consolidated Statements of Cash Flow...................... FS-6
Notes to Consolidated Financial Statements................ FS-7
</TABLE>
FS-1
<PAGE> 177
AUDITORS' REPORT TO THE SHAREHOLDERS
We have audited the consolidated balance sheets of Northstar Energy
Corporation as at December 31, 1997 and 1996 and the consolidated statements of
earnings, retained earnings and cash flow for each of the years in the three
year period ended December 31, 1997. These consolidated financial statements are
the responsibility of the company's management. Our responsibility is to express
an opinion on these financial statements based on our audits.
We conducted our audits in accordance with Canadian generally accepted
auditing standards. Those standards require that we plan and perform an audit to
obtain reasonable assurance 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.
In our opinion, these consolidated financial statements present fairly, in
all material respects, the financial position of the company as at December 31,
1997 and 1996, and the results of its operations and the changes in its cash
flow for each of the years in the three year period ended December 31, 1997 in
accordance with Canadian generally accepted accounting principles.
Accounting principles generally accepted in Canada vary in certain
significant respects from accounting principles generally accepted in the United
States. The application of the latter would have affected the determination of
net earnings and cash flows for each of the years in the three year period ended
December 31, 1997 and the determination of shareholders' equity at December 31,
1997 and 1996 to the extent summarized in Note 13.
(SIGNED) DELOITTE & TOUCHE
------------------------------------
Deloitte & Touche
Chartered Accountants
Calgary, Canada
March 19, 1998
(except Note 12
which is as of
July 31, 1998)
FS-2
<PAGE> 178
NORTHSTAR ENERGY CORPORATION
CONSOLIDATED BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
AS AT AS AT DECEMBER 31,
JUNE 30, -----------------------
1998 1997 1996
----------- ---------- ----------
(UNAUDITED)
(THOUSANDS OF CANADIAN DOLLARS)
<S> <C> <C> <C>
Current assets
Cash and short-term investments........................ $ -- $ -- $ 33,859
Accounts receivable.................................... 60,714 73,044 79,486
Investments (note 3)................................... 3,676 61,477 187
Nevis gas plant and B.C. pipeline (note 11)............ -- -- 138,113
Property disposition proceeds receivable (note 4)...... -- -- 64,500
Note receivable (note 3)............................... 34,813 -- --
---------- ---------- ----------
99,203 134,521 316,145
Capital assets (note 4).................................. 1,024,171 1,037,350 875,226
Deferred charges and investments (note 3)................ 45,828 6,291 53,513
---------- ---------- ----------
$1,169,202 $1,178,162 $1,244,884
========== ========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Accounts payable and accrued liabilities............... $ 55,884 $ 81,431 $ 84,032
Short-term bank loan (note 5).......................... 34,813 -- --
Current portion of long-term debt...................... -- 70,000 170,973
Current portion of deferred revenue.................... 1,322 1,322 1,322
---------- ---------- ----------
92,019 152,753 256,327
Long-term debt (note 5).................................. 443,384 435,141 184,896
Deferred revenue (note 6)................................ 12,097 12,040 14,861
Provision for future site restoration (note 4)........... 18,875 17,372 14,662
Deferred income taxes.................................... 176,264 168,761 136,066
---------- ---------- ----------
742,639 786,067 606,812
Shareholders' equity (note 8)............................ 426,563 392,095 638,072
---------- ---------- ----------
$1,169,202 $1,178,162 $1,244,884
========== ========== ==========
</TABLE>
Approved on behalf of the board
<TABLE>
<S> <C>
(SIGNED) JOHN A. HAGG (SIGNED) A. GORDON STOLLERY
- ----------------------------------------------------- -----------------------------------------------------
John A. Hagg A. Gordon Stollery
Director Director
</TABLE>
FS-3
<PAGE> 179
NORTHSTAR ENERGY CORPORATION
CONSOLIDATED STATEMENTS OF EARNINGS
<TABLE>
<CAPTION>
FOR THE SIX MONTHS ENDED
JUNE 30, FOR THE YEARS ENDED DECEMBER 31,
------------------------- ---------------------------------
1998 1997 1997 1996 1995
----------- ----------- --------- --------- ---------
(UNAUDITED) (UNAUDITED)
(THOUSANDS OF CANADIAN DOLLARS)
<S> <C> <C> <C> <C> <C>
Revenues
Oil and gas sales.................... $129,444 $157,244 $313,275 $334,128 $261,119
Net royalties........................ (19,177) (34,381) (57,776) (63,138) (43,372)
-------- -------- -------- -------- --------
110,267 122,863 255,499 270,990 217,747
Interest and other income............ 4,204 2,482 2,138 14,576 10,258
Gain on sale of assets (note 11)..... 39,949 40,696 40,671 14,453 --
Equity earnings (note 3)............. -- 3,999 8,578 8,111 1,905
-------- -------- -------- -------- --------
154,420 170,040 306,886 308,130 229,910
-------- -------- -------- -------- --------
Expenses
Operating............................ 29,110 24,585 53,274 56,940 47,852
General and administrative........... 6,876 7,222 12,494 7,639 8,969
Interest on long-term debt........... 15,602 9,171 27,302 17,105 12,392
Foreign exchange loss on repayment of
$US debt (note 5)................. -- -- 4,003 -- --
Depletion and depreciation (note
4)................................ 61,353 56,391 118,815 119,828 101,353
Income and capital taxes (note 9).... 8,774 31,689 40,933 44,556 22,766
-------- -------- -------- -------- --------
121,715 129,058 256,821 246,068 193,332
-------- -------- -------- -------- --------
Net earnings................. $ 32,705 $ 40,982 $ 50,065 $ 62,062 $ 36,578
======== ======== ======== ======== ========
Earnings per share -- basic............ $ 0.48 $ 0.52 $ 0.68 $ 0.72 $ 0.45
-- fully diluted... $ 0.46 $ 0.50 $ 0.66 $ 0.70 $ 0.44
</TABLE>
FS-4
<PAGE> 180
NORTHSTAR ENERGY CORPORATION
CONSOLIDATED STATEMENTS OF RETAINED EARNINGS
<TABLE>
<CAPTION>
FOR THE SIX MONTHS
ENDED JUNE 30, FOR THE YEARS ENDED DECEMBER 31,
------------------------- ----------------------------------
1998 1997 1997 1996 1995
----------- ----------- ---------- --------- ---------
(UNAUDITED) (UNAUDITED)
(THOUSANDS OF CANADIAN DOLLARS)
<S> <C> <C> <C> <C> <C>
Retained earnings, beginning of
period.............................. $ 77,723 $246,443 $ 246,443 $186,975 $152,908
Net earnings.......................... 32,705 40,982 50,065 62,062 36,578
Repurchase of common shares (note
8).................................. -- (206,353) (206,353) -- --
Merger costs, net of deferred taxes
(note 1)............................ -- (12,370) (12,432) -- --
Dividends............................. -- -- -- (2,594) (2,511)
-------- -------- --------- -------- --------
Retained earnings, end of period...... $110,428 $ 68,702 $ 77,723 $246,443 $186,975
======== ======== ========= ======== ========
</TABLE>
FS-5
<PAGE> 181
NORTHSTAR ENERGY CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOW
<TABLE>
<CAPTION>
FOR THE SIX MONTHS
ENDED JUNE 30, FOR THE YEARS ENDED DECEMBER 31,
------------------------- ---------------------------------
1998 1997 1997 1996 1995
----------- ----------- --------- --------- ---------
(UNAUDITED) (UNAUDITED)
(THOUSANDS OF CANADIAN DOLLARS)
<S> <C> <C> <C> <C> <C>
Provided by operating activities
Cash flow from operations (note 10)... $ 62,344 $ 86,050 $ 167,044 $ 205,307 $ 157,096
Change in non-cash trade accounts..... (13,217) (17,523) 3,841 (4,531) (9,810)
-------- --------- --------- --------- ---------
49,127 68,527 170,885 200,776 147,286
-------- --------- --------- --------- ---------
Provided by (used for) financing
activities
Long-term debt, net................... (72,445) 80,708 141,240 143,759 191,704
Common shares issued for cash......... 1,762 15,602 16,777 55,950 14,030
Common shares repurchased............. -- (300,387) (300,387) -- --
Merger costs.......................... -- (16,756) (17,453) -- --
Deferred revenue...................... 57 (2,011) (2,821) (6,926) 5,060
Dividends............................. -- -- -- (2,594) (2,511)
-------- --------- --------- --------- ---------
(70,626) (222,844) (162,644) 190,189 208,283
-------- --------- --------- --------- ---------
Provided by (used for) investing
activities
Capital assets........................ (45,309) (122,813) (275,777) (193,663) (329,777)
Investments and other assets.......... -- -- (6,750) (10,799) (20,699)
Proceeds on sale of assets............ 68,170 243,271 243,284 23,125 --
Site restoration...................... (1,362) -- (2,857) (1,852) (1,038)
Acquisition of Nevis gas plant (note
11)................................ -- -- -- (119,295) --
Changes in non-cash working capital
related to investing activities.... -- -- -- (64,500) (16,750)
-------- --------- --------- --------- ---------
21,499 120,458 (42,100) (366,984) (368,264)
-------- --------- --------- --------- ---------
Increase (decrease) in cash position.... -- (33,859) (33,859) 23,981 (12,695)
Cash position, beginning of period...... -- 33,859 33,859 9,878 22,573
-------- --------- --------- --------- ---------
Cash position, end of period............ $ -- $ -- $ -- $ 33,859 $ 9,878
======== ========= ========= ========= =========
</TABLE>
FS-6
<PAGE> 182
NORTHSTAR ENERGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
(INFORMATION AS AT JUNE 30, 1998 AND FOR THE SIX MONTH PERIODS ENDED
JUNE 30, 1998 AND 1997 IS UNAUDITED)
Northstar Energy Corporation ("the Company" or "Northstar") operates in the
oil and gas industry in Canada. The consolidated financial statements of the
Company are stated in Canadian dollars and have been prepared by management in
accordance with accounting principles generally accepted in Canada, consistently
applied. These consolidated financial statements have, in management's opinion,
been properly prepared within reasonable limits of materiality and in light of
information available up to March 19, 1998. Significant accounting policies are
summarized in Note 2.
NOTE 1 -- BASIS OF PRESENTATION
On March 14, 1997, pursuant to an offer to purchase all of the shares of
Morrison Petroleums Ltd. ("Morrison") set out in an information circular dated
February 21, 1997, the Company entered into a business combination with
Morrison, a company operating in the oil and gas industry primarily in western
Canada. In March 1997 Northstar issued a total of 46,146,933 common shares, at a
rate of 0.7 Northstar common share for each Morrison share, following which the
former shareholders of Morrison held 53 percent and the former shareholders of
Northstar held 47 percent of the then outstanding common shares of the combined
company. On March 14, 1997, the closing market price of the Northstar common
shares was $14.70 per share.
The nature of the business combination was such that neither of the
combining companies could be identified as the acquirer for accounting purposes.
Accordingly, the business combination has been accounted for using the
pooling-of-interest method of accounting whereby the consolidated financial
statements reflect the combined historical carrying values of the assets,
liabilities and shareholders' equity, and the historical operating results of
Northstar and Morrison for each of the periods presented. The accounting
policies of both companies were substantially identical and changes were not
required to the numbers previously reported by the two companies. However,
certain prior year information has been reclassified to conform to the current
method of presentation.
The book value of the assets and liabilities brought into the combination
by each of the combining companies approximate those at March 31, 1997, which
are set out below:
<TABLE>
<CAPTION>
NORTHSTAR MORRISON
--------- ---------
(THOUSANDS)
<S> <C> <C>
Assets
Current assets............................................ $ 46,443 $ 101,424
Capital assets............................................ 384,156 548,161
Investments and other assets.............................. 28,950 29,120
-------- ---------
459,549 678,705
-------- ---------
Liabilities
Current liabilities....................................... (44,267) (51,594)
Long-term debt............................................ (83,058) (103,823)
Deferred revenue.......................................... (6,156) (7,488)
Deferred obligations...................................... (6,652) (8,873)
Deferred income taxes..................................... (45,215) (112,289)
-------- ---------
$274,201 $ 394,638
======== =========
</TABLE>
FS-7
<PAGE> 183
NORTHSTAR ENERGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The revenues and net income of Northstar and Morrison for the period
January 1, 1997 to March 31, 1997 are set out below:
<TABLE>
<CAPTION>
NORTHSTAR MORRISON
--------- --------
(THOUSANDS)
<S> <C> <C>
Revenues, net of royalties.................................. $38,920 $26,751
Net earnings................................................ $ 9,411 $28,515(1)
======= =======
</TABLE>
- ---------------
(1) Includes an after-tax gain on sale of assets of $24.9 million.
Costs of $17.8 million ($12.4 million net of deferred income taxes),
consisting mainly of professional and advisory fees, employee severance charges
and other costs directly related to the business combination have been charged
to retained earnings in the current period.
NOTE 2 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the Company
and all of its subsidiaries. The accounts of Mountain Energy Inc. ("Mountain
Energy"), a corporation in which both Northstar and Morrison Middlefield
Resources Limited ("MMRL") each have a 50% interest, is accounted for using the
proportionate consolidation basis. Substantially all of the Company's petroleum
and natural gas operations are conducted jointly with others and these financial
statements reflect only the Company's proportionate interest in such activities.
SHORT-TERM INVESTMENTS
Short-term investments consist of readily marketable Canadian government
bonds and similar investments and are recorded at the lower of cost and market
value.
EQUITY INVESTMENTS
The Company holds a 48% interest in West Windsor Power (an Ontario General
Partnership) ("West Windsor Power") and, accordingly, accounts for this
investment using the equity method. Those direct costs relating to the
investment incurred by the Company are amortized over the estimated useful life
of the cogeneration plant owned by the partnership, which is estimated to be 30
years.
The Company also accounts for its 21.5% interest in MMRL under the equity
method.
EXPLORATION AND DEVELOPMENT COSTS
The Company follows the full cost method whereby exploration and
development costs are capitalized. Those costs include direct acquisition,
exploration and development costs together with applicable overhead and carrying
charges, net of government incentives and tax credits. Interest expense is not
capitalized except for interest on financing which is directly related to the
pre-production phase of major development projects. Proceeds from disposals are
normally deducted from net capital costs without recognition of gains or losses.
Costs subject to depletion under the full cost method include estimated
future site restoration costs. This estimate includes the cost of production
equipment removal and environmental clean-up based upon regulations and economic
considerations applicable at year-end. The annual provision for future
restoration costs is included with depletion and depreciation.
A ceiling test is employed annually to ensure costs accumulated by the
Company do not exceed estimated future cash flows from proven reserves and the
cost of undeveloped properties. For the purposes of this test,
FS-8
<PAGE> 184
NORTHSTAR ENERGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
future cash flows are determined using year-end prices and costs, including
deductions for applicable overhead, financing and income tax expenses. The
Company periodically performs an impairment test relative to the capitalized
cost of undeveloped properties.
DEPLETION AND DEPRECIATION
Petroleum and natural gas properties, excluding undeveloped properties, are
depleted using the unit-of-production method based on estimated proven reserves
before deduction of royalties and after conversion to units of common measure
based on relative energy content. Processing facilities are depreciated based on
the estimated reserve life of each facility. Other assets are depreciated or
amortized based on various rates relating to the estimated useful life of each
asset.
REVENUE RECOGNITION
Payments received for undelivered gas are initially deferred and are
recognized as revenue when deliveries are made or on the expiry of the period
allowed for such deliveries.
FOREIGN CURRENCY TRANSLATION
Revenues and expenses arising in foreign currencies are translated at the
average rate of exchange during the month in which the transaction occurred.
Monetary assets and liabilities denominated in foreign currencies are translated
at exchange rates in effect at the balance sheet date. Exchange gains and losses
are included in income, except for unrealized exchange gains or losses arising
on translation of long-term debt, which are deferred and amortized over the term
of the debt.
COMMODITY PRICE SWAPS
The Company has entered into oil and natural gas price and foreign exchange
rate swap contracts to mitigate the effects of price and foreign exchange
fluctuations on its earnings.
Gains and losses arising from the swaps are deferred and reported as
adjustments to revenues at the time of sale of the related products (see
Financial Instruments, Note 7). The carrying amounts of these instruments are
included in accounts receivable in the case of contracts in a net receivable
position and accounts payable in the case of contracts in a net payable
position.
MEASUREMENT UNCERTAINTY
The amounts recorded for depletion, depreciation and amortization of
capital assets and the provision for future site restoration and reclamation
costs are based on estimates. The ceiling test is based on estimates of proved
reserves, production rates, oil and gas prices, future costs and other relevant
assumptions. By their nature, these estimates are subject to measurement
uncertainty and the effect on the financial statements of changes in such
estimates in future periods could be significant.
FS-9
<PAGE> 185
NORTHSTAR ENERGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 3 -- DEFERRED CHARGES AND INVESTMENTS
<TABLE>
<CAPTION>
DECEMBER 31,
JUNE 30, -----------------
1998 1997 1996
----------- ------- -------
(THOUSANDS)
<S> <C> <C> <C>
West Windsor Power -- investment............................ $ -- $11,744 $10,211
-- direct costs...................... -- 16,175 16,075
------- ------- -------
-- 27,919 26,286
Less: amortization........................................ -- 1,142 606
------- ------- -------
-- 26,777 25,680
MMRL (market value June 30, 1998 -- $29,518; December 31,
1997 -- $44,277; December 31, 1996 -- $38,098)............ 29,332 29,754 20,362
Other investments........................................... 3,676 4,946 4,749
------- ------- -------
Total investments........................................... 33,008 61,477 50,791
Land........................................................ 948 971 971
Deferred foreign exchange................................... 14,813 4,801 712
Deferred charges, net of accumulated amortization........... 735 519 1,226
------- ------- -------
49,504 67,768 53,700
Less: investments classified as current assets............ 3,676 61,477 187
------- ------- -------
$45,828 $ 6,291 $53,513
======= ======= =======
</TABLE>
West Windsor Power owns and operates a 109 megawatt cogeneration plant
located in Windsor, Ontario which produces power which is sold to Ontario Hydro
under a 20 year contract. The plant commenced commercial operations in November
1995.
The partnership's interest in its cogeneration facility is financed by way
of a non-recourse term loan to the partnership through a syndicate of
international banks. Security for the loan is limited to the assets of the
partnership, with no recourse to other assets of the Company or its partners. In
connection with the construction of the plant and financing, the Company
contributed $14.7 million of equity (December 31, 1997 and 1996 -- $14.7
million). The Company also issued irrevocable letters of credit amounting to
$6.2 million in favour of the financing syndicate.
The Company capitalized $NIL, $NIL, $0.1 million, $3.0 million and $0.1
million during the six month periods ended June 30, 1998 and 1997, and the years
ended December 31, 1997, 1996 and 1995, respectively of direct costs, net of
development fees, in connection with its investment in the partnership. Equity
income recorded from the Company's investment in West Windsor Power amounted to
$NIL and $2.6 million for the six month periods ended June 30, 1998 and 1997,
and $5.7 million, $3.9 million and $1.0 million for the years ended December 31,
1997, 1996 and 1995 respectively.
In March 1998, the Company completed the sale of its investment in West
Windsor Power for consideration of $72.3 million, resulting in a pre-tax gain of
approximately $40 million. The proceeds received include two non-interest
bearing notes receivable of $36 million and $36.3 million. The $36 million note
was purchased by a chartered bank on a discounted basis, and the proceeds of
$35.8 million were applied against long-term bank debt. The $36.3 million note
receivable has been recorded on the balance sheet at its discounted value of
$34.8 million. This note was used to secure a new short-term bank loan of $34.8
million which was applied against long-term bank debt (Note 5).
The investment in MMRL represents the cost, together with equity earnings,
of the Company's investment in the common shares of MMRL. The Company has
accounted for its interest in MMRL under the equity method with effect from
January 6, 1995. At that time the Company's cost was less than MMRL's underlying
net book value by $1.5 million. This difference is being amortized to earnings
over the life of the
FS-10
<PAGE> 186
NORTHSTAR ENERGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
related oil and natural gas reserves. At June 30, 1998 the shares held by
Northstar represented approximately 21.5% of the issued and outstanding shares
of MMRL. Northstar also has options to purchase an additional 1,189,732 common
shares of MMRL at a price of $5.00 per common share. Including these options,
Northstar's interest in MMRL is approximately 26% on a fully diluted basis. The
Company is a co-manager of MMRL and receives management fees for services
provided to MMRL. Management fees earned in the six month periods ended June 30,
1998 and 1997 amounted to $0.6 million and $2.5 million, respectively, and in
the years ended December 31, 1997, 1996 and 1995 amounted to $4.4 million, $4.1
million and $1.9 million, respectively. At June 30, 1998 MMRL owed Northstar
$0.6 million (December 31, 1997 -- $0.7 million; December 31, 1996 -- $0.2
million due to MMRL) in respect of activities managed by Northstar.
On January 31, 1996, the Company increased its investment in common shares
of MMRL through the exercise of warrants to purchase common shares.
Substantially all of the warrants held by other warrant holders of MMRL were
exercised prior to their expiry on January 31, 1996, following which Northstar's
interest in MMRL was diluted. A dilution gain of $1.4 million was recorded on
the deemed disposition of a portion of Northstar's investment in MMRL and is
included in equity income. Equity income recorded from the Company's investment
in MMRL amounted to $NIL, $1.4 million, $2.9 million, $4.2 million and $0.9
million for the six month periods ended June 30, 1998 and 1997, and for the
years ended December 31, 1997, 1996 and 1995, respectively.
Other investments at June 30, 1998 include marketable securities with an
aggregate cost of $2.9 million; (December 31, 1997 -- $3.3 million; December 31,
1996 -- $1.5 million) which have a market value of $4.1 million (December 31,
1997 -- $5.6 million; December 31, 1996 -- $2.5 million).
Northstar's other investments, including the cost of the investment in
MMRL, were classified as current assets at December 31, 1997 due to Northstar's
intention to sell these investments in 1998. In May 1998, Northstar reached an
agreement with MMRL to exchange the shares and options of MMRL held by Northstar
for MMRL's 50% interest in Mountain Energy which owns certain of MMRL's Canadian
oil and gas properties. The transaction closed on July 31, 1998 with a June 30,
1998 effective date. Accordingly, the investment in MMRL was reclassified as a
non-current asset at June 30, 1998. Under the terms of the agreement, Northstar
will no longer act as co-manager of MMRL and will not be entitled to earn
management fees with effect from June 1, 1998.
NOTE 4 -- CAPITAL ASSETS
<TABLE>
<CAPTION>
JUNE 30, 1998 DECEMBER 31, 1997
--------------------------------------- ---------------------------------------
ACCUMULATED ACCUMULATED
DEPLETION AND DEPLETION AND
COST DEPRECIATION NET COST DEPRECIATION NET
---------- ------------- ---------- ---------- ------------- ----------
(THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Petroleum and natural
gas properties...... $1,491,688 $565,739 $ 925,949 $1,440,909 $511,171 $ 929,738
Natural gas
processing
facilities.......... 116,932 25,790 91,142 123,456 24,126 99,330
Other assets......... 19,865 12,785 7,080 20,295 12,013 8,282
---------- -------- ---------- ---------- -------- ----------
$1,628,485 $604,314 $1,024,171 $1,584,660 $547,310 $1,037,350
========== ======== ========== ========== ======== ==========
<CAPTION>
DECEMBER 31, 1996
-------------------------------------
ACCUMULATED
DEPLETION AND
COST DEPRECIATION NET
---------- ------------- --------
(THOUSANDS)
<S> <C> <C> <C>
Petroleum and natural
gas properties...... $1,173,468 $405,930 $767,538
Natural gas
processing
facilities.......... 116,694 18,160 98,534
Other assets......... 18,803 9,649 9,154
---------- -------- --------
$1,308,965 $433,739 $875,226
========== ======== ========
</TABLE>
Undeveloped acreage and related seismic costs not subject to depletion
amounted to $83.1 million at June 30, 1998 and December 31, 1997, and $73.5
million at December 31, 1996.
The provision for future estimated site reclamation costs amounted to $2.9
million, $3.2 million, $5.9 million, $6.3 million and $4.2 million for the six
month periods ended June 30, 1998 and 1997 and for the years ended December 31,
1997, 1996 and 1995, respectively.
FS-11
<PAGE> 187
NORTHSTAR ENERGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
In December 1996, the Company entered into agreements relating to the sale
of certain non-core oil and natural gas properties. Proceeds aggregating $64.5
million were receivable at December 31, 1996 in respect of dispositions which
closed in January 1997. The amounts receivable in respect of these sales have
been removed from property, plant and equipment and classified as a current
asset. No gains or losses were attributable to these dispositions.
NOTE 5 -- SHORT-TERM BANK LOAN AND LONG-TERM DEBT
In March 1998, Northstar arranged a short-term non-revolving bank loan in
the amount of $34.8 million with a Canadian chartered bank. The loan is
repayable in full on January 4, 1999 and is secured by the note receivable in
connection with the sale of West Windsor Power.
<TABLE>
<CAPTION>
DECEMBER 31,
JUNE 30, --------------------
1998 1997 1996
-------- -------- --------
(THOUSANDS)
<S> <C> <C> <C>
6.79% senior notes due March 2, 2009 (US$150,000).......... $220,740 $ -- $ --
6.76% senior notes due July 19, 2005 (US$75,000)........... 110,370 107,183 102,720
7.03% senior notes due November 7, 2005 (US$60,000)........ -- 85,746 82,176
Bank debt.................................................. 112,274 312,212 121,680
Promissory note payable and preferred shares of Mountain
Energy................................................... -- -- 44,290
Capital lease obligation................................... -- -- 5,003
-------- -------- --------
443,384 505,141 355,869
Less: portion classified as current........................ -- 70,000 170,973
-------- -------- --------
$443,384 $435,141 $184,896
======== ======== ========
</TABLE>
On March 2, 1998, Northstar issued US$150 million senior notes by way of a
private placement. The notes, which are unsecured, bear interest at 6.79% and
are repayable in three equal annual installments of US$50 million commencing in
2007. Proceeds received from the notes were used to repay US$60 million
outstanding under the Company's 7.03% senior notes and the balance was applied
to bank debt. Foreign exchange losses and other charges which had previously
been deferred in respect of the 7.03% senior notes were charged to earnings at
December 31, 1997.
The 6.76% senior notes, which are unsecured, were issued in 1995 pursuant
to a private placement with institutional investors in the United States. The
notes bear interest at the annual interest rates disclosed above and are
repayable in five annual installments of US$15 million, commencing in 2001.
In 1997, Northstar arranged an extendible revolving term credit facility in
the amount of $300 million with a syndicate of Canadian banks and a separate $60
million extendible operating credit facility with a Canadian chartered bank.
These facilities, which are unsecured, are renewable annually by mutual
agreement. In the event that the facilities are not renewed by the lenders, any
borrowings outstanding become repayable in equal consecutive quarterly
installments over a 66 month period commencing four months after the renewal
date. The facilities provide for various interest rate and Bankers Acceptance
fee options, which are based on market rates in effect from time to time and the
Company's debt to cash flow ratio. During the second quarter of 1998, the
extendible revolving long-term credit facility and the extendible operating
credit facility were reduced to $150 million and $50 million, respectively, at
the request of the Company. At June 30, 1998, borrowings under these facilities
amounted to $125.0 million and bore interest at an average interest rate of
5.83%. In March 1998, following the receipt of proceeds on the sale of the
cogeneration investment, long-term bank debt was reduced by approximately $70.0
million. Accordingly, this amount has been classified as a current liability at
December 31, 1997. Bank debt outstanding at December 31, 1996 was classified as
current due to its repayment in January 1997 with proceeds received on the sale
of the Nevis gas plant and the B.C. pipeline to the Morrison Facilities Income
Fund.
FS-12
<PAGE> 188
NORTHSTAR ENERGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The promissory note payable and preferred shares of Mountain Energy
represented Northstar's proportionate share of obligations of Mountain Energy in
connection with an oil and natural gas property purchase completed by that
company. The preferred shares, which were entitled to dividends at 2.2% per
annum, were redeemed by Mountain Energy in 1997. The promissory note, of which
Northstar's share was $11.4 million, bore interest at 5.25% per annum and was
repaid in 1997.
In October 1997, the Company exercised its buyout option under a capital
lease obligation in respect of certain gas plant equipment which bore interest
at 8.75% per annum. At December 31, 1996, the capitalized cost of the leased
equipment was $9.4 million and accumulated depreciation amounted to $3.8
million.
NOTE 6 -- DEFERRED REVENUE
Included in deferred revenue at June 30, 1998, and December 31, 1997 and
1996 is $7.3 million, $6.6 million, and $8.4 million, respectively, representing
amounts received on foreign exchange and crude oil and natural gas price forward
sale agreements. These amounts will be recognized in income during the period
1998 to 2000, the terms of the related forward sale agreements.
Deferred revenue also includes at June 30, 1998 and at December 31, 1997
and 1996, $6.1 million, $6.7 million, and $7.8 million, respectively, in respect
of a prepaid gas sales contract. Under the contract, the Company is required to
sell 26 billion cubic feet of natural gas to a United States-based purchaser
over an estimated 12 year period, which commenced November 1, 1990. In addition
to amounts paid by the purchaser for the natural gas sold under the contract,
the contract requires the purchaser to pay operating fees and Crown royalties
associated with contracted production. Cumulative natural gas deliveries
pursuant to the contract to June 30, 1998 amounted to 16 billion cubic feet.
Estimated deliveries for 1998 are 2.2 billion cubic feet, in respect of which
$1.3 million has been classified as a current liability.
The Company's obligation to deliver natural gas under the contract is
secured by a fixed charge on certain natural gas reserves. In management's
opinion, the Company has available production capacity in excess of the
contracted volumes. Therefore, delivery obligations will be satisfied from
production, and no repayments will be required.
NOTE 7 -- FINANCIAL INSTRUMENTS AND COMMODITY CONTRACTS
FINANCIAL INSTRUMENTS
Northstar has entered into contracts to manage its exposure to fluctuations
in oil and natural gas prices and foreign exchange rates. The Company is exposed
to credit risk to the extent of non-performance by counterparties to the
contracts. However, the Company minimizes this risk by only entering into
agreements with highly rated major international financial institutions. Maximum
exposure to credit losses on these financial instruments approximates their fair
value as disclosed below.
OIL AND NATURAL GAS PRICES
At June 30, 1998, the Company had sold forward approximately 8,000 Bbls per
day of remaining 1998 crude oil and liquids production, representing
approximately 40 percent of first half of 1998 production levels. Approximately
7,000 Bbls per day have been sold at an average price of US$19.16 per Bbl and
1,000 Bbls per day have been sold at a price of Cdn$24.13 per Bbl. An additional
500 Bbls per day of 1999 production has been sold at an average price of
US$20.01 per Bbl. In addition, the Company has sold call options in respect of
12,500 Bbls per day of production during the period July to December 1998. The
options are exercisable by the holder at an average price of US$19.97 per Bbl.
Northstar has also sold forward approximately 33 MMcf per day of 1998
natural gas production (representing approximately 16 percent of first half of
1998 production levels) at an average price of $1.75 per
FS-13
<PAGE> 189
NORTHSTAR ENERGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Mcf. Substantially all of this production relates to periods ending on or before
October 31, 1998. Production sold forward in respect of subsequent years
approximates 18 MMcf per day in 1999 and 4 MMcf per day in 2000 at $2.19 and
$1.73 per Mcf, respectively. In addition, the Company has entered into indexed
base swap arrangements in respect of 17 MMcf per day of 1998 natural gas
production, 9 MMcf per day of 1999 production and 5 MMcf per day for the period
January 1, 2000 to March 31, 2002 and has also sold call options in respect of
25 MMcf per day of production during the period April to October 1998. The
options are exercisable by the holder at an average price of $2.37 per Mcf.
FOREIGN EXCHANGE
To reduce the exposure to exchange rate fluctuations on US dollar revenues,
the Company has entered into exchange rate contracts to sell US$60 million
during each of the years 1998 and 1999 at an average rate of US$0.732 and
US$0.726, respectively, and US$30 million in 2000 at US$0.727.
CARRYING AMOUNTS AND ESTIMATED FAIR VALUES OF FINANCIAL INSTRUMENTS
Northstar's financial instruments recognized on the consolidated balance
sheets consist of cash, marketable securities, accounts receivable, investments,
accounts payable and long-term debt. With the exception of investments, the fair
values of all financial instruments classified as current assets or current
liabilities approximate their carrying amounts due to the short-term maturity of
these instruments. The following table summarizes estimated fair value of
commodity and foreign exchange contracts, investments and non-current financial
instruments:
<TABLE>
<CAPTION>
JUNE 30, 1998 DECEMBER 31, 1997 DECEMBER 31, 1996
--------------------- --------------------- ----------------------
CARRYING FAIR CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE AMOUNT VALUE
--------- --------- --------- --------- --------- ----------
(THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Crude oil
contracts.......... $ (729) $ 8,100 $ 221 $ 4,900 $ (313) $ (7,021)
Natural gas
contracts.......... (905) (10,000) (357) 200 139 (3,244)
Foreign exchange
contracts.......... (1,210) (11,100) (483) (7,200) -- 2,500
Cogeneration
investment......... -- -- 26,777 72,400 25,680 Note below
Investments.......... 33,008 34,592 34,700 51,602 25,111 52,630
Long-term debt....... $(443,384) $(464,062) $(435,141) $(444,926) $(184,896) $ (182,361)
</TABLE>
The fair value of crude oil and natural gas contracts is based on quotes
provided by brokers while the fair value of investments is determined primarily
on the basis of market quotes. The fair value of long-term debt has been
estimated by discounting the principal and interest payments at rates available
to the Company for debt of similar terms and maturity. The fair value of the
cogeneration investment at December 31, 1997 is based on the selling price
negotiated with the purchaser in a sale completed in March 1998. At December 31,
1996, management estimated that the fair value of the cogeneration investment
was in excess of its carrying value.
COMMODITY CONTRACTS
In addition to the financial instruments set out above, Northstar has also
entered into fixed price natural gas sales contracts for approximately 44.3 MMcf
per day in 1998 at an average price of $1.91 per Mcf, 47.7 MMcf per day in 1999
at an average price of $2.07 per Mcf and 46.4 MMcf per day for the years 2000 to
2002 at average prices between $2.25 and $2.33 per Mcf. Another 32 MMcf per day
of natural gas production has been sold under five to ten year contracts at an
initial price of $1.87 per Mcf, escalating at approximately 4% for the duration
of the contracts.
FS-14
<PAGE> 190
NORTHSTAR ENERGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 8 -- SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------------------------
JUNE 30, 1998 1997 1996
--------------------- ---------------------- ---------------------
NUMBER OF NUMBER OF NUMBER OF
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT
---------- -------- ----------- -------- ---------- --------
(THOUSANDS FOR DOLLAR AMOUNTS)
<S> <C> <C> <C> <C> <C> <C>
Common shares
Authorized: unlimited number of
shares issued:
Beginning of period........... 67,963,722 $314,372 86,956,189 $391,629 81,790,738 $334,712
On exercise of stock options
and employee retirement
savings plan................ 323,616 1,763 1,697,060 16,777 897,761 7,467
Shares repurchased............ -- -- (20,689,527) (94,034)
Public share offering......... -- -- -- -- 3,500,000 48,691
Under flow through share
agreements.................. -- -- -- -- 767,690 759
---------- -------- ----------- -------- ---------- --------
End of period................. 68,287,338 316,135 67,963,722 314,372 86,956,189 391,629
Retained earnings................. -- 110,428 -- 77,723 -- 246,443
---------- -------- ----------- -------- ---------- --------
-- $426,563 -- $392,095 -- $638,072
========== ======== =========== ======== ========== ========
</TABLE>
On April 16, 1997, pursuant to an issuer bid, the Company repurchased
20,689,527 of its common shares at a price of $14.50 per share. The aggregate
cost of the repurchase amounted to $300.4 million, of which $94.0 million was
charged to share capital. The remaining $206.4 million, representing the amount
paid in excess of the average carrying value of the common shares repurchased,
was charged to retained earnings.
On February 23, 1996, the Company issued 3,500,000 common shares for
proceeds of $47.8 million net of issue costs.
Under the flow through share agreements, subscribers are entitled to
deduct, for income tax purposes, the expenditures made by the Company on
qualifying oil and gas activities from funds subscribed and the Company retains
the right to the oil and gas properties to which the expenditures relate. The
Company has recorded as share capital the share subscriptions received, less the
tax effect of subsequent oil and gas expenditures not being deductible for
income tax purposes by the Company. Flow through shares issued in 1996 include
701,750 common shares for which the related subscriptions of $8.0 million were
received and included in share capital in 1995. The shares were issued in 1996
after the qualifying expenditures had been incurred.
STOCK OPTIONS
As at June 30, 1998, the Company had reserved 4,184,300 common shares under
stock option agreements granted to employees pursuant to Northstar's stock
option plan. Options in respect of an additional 1,141,826 common shares were
also outstanding, resulting from conversion privileges granted to former
Morrison option holders at the time of the merger. All options are exercisable
at prices ranging from $4.76 to $15.50 per share at various times during the
period ending 2004. The weighted average exercise price for these options is
approximately $11.09. Options in respect of 2,263,194 common shares were vested
at June 30, 1998.
PREFERRED SHARES
The authorized capital of the Company includes 100 million First Preferred
Shares and 100 million Second Preferred Shares, of which none are currently
issued or outstanding.
FS-15
<PAGE> 191
NORTHSTAR ENERGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 9 -- INCOME AND CAPITAL TAXES
The income tax provision differs from the amount that would be computed by
applying the combined Canadian federal and provincial income tax rate of 44.6%
(1996 -- 44.8%, 1995 -- 44.2%) to earnings before taxes. The reasons for this
difference are as follows:
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
---------------------------------- -----------------------------------------------------
1998 1997 1997 1996 1995
---------------- --------------- ---------------- ---------------- ---------------
(THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Earnings before taxes........... $ 41,479 100.0% $72,671 100.0% $ 90,998 100.0% $106,618 100.0% $59,344 100.0%
-------- ----- ------- ----- -------- ----- -------- ----- ------- -----
Computed "expected" income
taxes......................... 18,508 44.6 32,425 44.6 $ 40,603 44.6 $ 47,775 44.8 26,209 44.2
Non-deductible crown payments... 7,411 17.9 13,025 17.9 20,935 23.0 22,603 21.2 15,114 25.4
Resource allowance.............. (7,430) (17.9) (10,853) (14.9) (21,163) (23.3) (23,049) (21.6) (17,198) (29.0)
Alberta royalty tax credit...... (334) (0.8) (556) (0.8) (937) (1.0) (1,390) (1.3) (1,393) (2.3)
Non-deductible depletion........ 1,144 2.8 939 1.3 2,254 2.5 (65) (0.1) (1,558) (2.6)
Non-taxable portion of capital
gains......................... (11,813) (28.5) (2,457) (3.4) (1,920) (2.1) (1,913) (1.8) -- --
Other........................... 17 -- (2,270) (3.1) (1,665) (1.8) (2,232) (2.1) (104) (0.2)
-------- ----- ------- ----- -------- ----- -------- ----- ------- -----
Deferred income taxes........... 7,503 18.1 30,253 41.6 38,107 41.9 41,729 39.1 21,070 35.5
Capital taxes................... 1,271 3.1 1,436 2.0 2,826 3.1 2,827 2.7 1,696 2.9
-------- ----- ------- ----- -------- ----- -------- ----- ------- -----
$ 8,774 21.2% $31,689 43.6% $ 40,933 45.0% $ 44,556 41.8% $22,766 38.4%
======== ===== ======= ===== ======== ===== ======== ===== ======= =====
</TABLE>
NOTE 10 -- CASH FLOW FROM OPERATIONS
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
------------------ ------------------------------
1998 1997 1997 1996 1995
-------- ------- -------- -------- --------
(THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C>
Net earnings................................. $ 32,705 $40,982 $ 50,065 $ 62,062 $ 36,578
Non cash items: -- depletion and
depreciation................. 61,353 56,391 118,815 119,828 101,353
-- deferred income taxes.... 7,503 30,253 38,107 41,729 21,070
-- gain on sale of assets... (39,949) (40,696) (40,671) (14,453) --
-- equity earnings.......... -- (3,999) (8,578) (8,111) (1,905)
-- cash distribution from
West Windsor Power
earnings................. -- 3,119 4,632 4,057 --
-- amortization of deferred
charges.................... 732 -- 671 195 --
-- foreign exchange loss on
repayment of $US debt.... -- -- 4,003 -- --
-------- ------- -------- -------- --------
Cash flow from operations.................... $ 62,344 $86,050 $167,044 $205,307 $157,096
======== ======= ======== ======== ========
</TABLE>
NOTE 11 -- NEVIS GAS PLANT AND B.C. PIPELINE
On January 28, 1997, the Company completed the sale of its 100 percent
interest in both the Nevis gas plant and a crude oil pipeline system in
northeastern British Columbia to a wholly owned subsidiary of the Morrison
Facilities Income Fund ("the Fund") for a net cash consideration of $178.8
million. A gain of $40.7 million was recorded in 1997 related to this
disposition. The Fund, which raised the proceeds through a public issue of trust
units, is an unincorporated trust governed by the laws of Alberta. Northstar
does not hold any trust units in the Fund but has entered into management and
administration agreements with the Fund and its subsidiary. Under these
agreements, Northstar provides management and other services to the Fund, for
which it earned a management fee of $0.7 million in 1997. Included in accounts
receivable at December 31, 1997 is an amount of $1.1 million due from the Fund
in respect of costs incurred by Northstar on behalf of the Fund.
FS-16
<PAGE> 192
NORTHSTAR ENERGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
At December 31, 1996, the cost of the assets subsequently sold to the Fund
was $142.1 million and accumulated depreciation thereon amounted to $4.0
million. The net book value of $138.1 million was classified as a current asset.
In November 1996, a gain of $14.5 million was recorded on the sale of an
investment in CGGS Canadian Gas Gathering Systems Inc. ("CGGS"), a private
company formerly managed by the Company. All of the shares of CGGS, including
those held by the Company, were acquired by a third party on November 16, 1996.
Prior to the sale of CGGS, the Company was entitled to receive fees upon the
acquisition by CGGS of producing natural gas properties, gas plants and related
gas gathering systems as well as fees for management services provided to CGGS.
Fees earned from CGGS during the year ended December 31, 1996 amounted to $3.3
million.
NOTE 12 -- SUBSEQUENT EVENTS
Subsequent to June 30, 1998, the following events occurred:
In May 1998, Northstar reached an agreement with MMRL to exchange the
shares and options of MMRL held by Northstar for MMRL's 50% interest in
Mountain Energy which owns certain of MMRL's Canadian oil and gas
properties. The transaction was effective June 30, 1998 and closed on July
31, 1998.
On June 29, 1998 Northstar reached an agreement with Devon Energy
Corporation, an oil and gas exploration and development company based in
Oklahoma, to merge the two companies. Under the agreement, Northstar
shareholders will receive .227 Devon common equivalent shares (subject to
adjustment in certain circumstances to a maximum exchange ratio of .235
Devon shares). The merger is subject to approval by the shareholders of
both companies as well as certain regulatory and court approvals including
by way of a plan of arrangement in Canada.
Devon and Northstar have each undertaken to pay the other substantive
termination fees in the event the merger is not completed and to provide
each other certain other rights and non-solicitation provisions.
NOTE 13 -- CANADIAN AND UNITED STATES DIFFERENCES IN ACCOUNTING PRINCIPLES
These financial statements have been prepared in accordance with Canadian
generally accepted accounting principles (GAAP). As indicated below, in certain
aspects GAAP as applied in the United States differs from Canadian GAAP.
(a) Under U.S. GAAP, the business combination with Morrison Petroleums Ltd.
in March 1997 would have been accounted for as a purchase, with Morrison being
deemed the acquirer, rather than as a pooling-of-interests. Under the purchase
method of accounting, the consideration paid is based on the fair value of the
Northstar shares deemed to have been issued to the former Northstar shareholders
and the purchase price including the fair value of assumed liabilities would be
allocated to the assets acquired. Under the purchase method of accounting,
results of operations of the acquired entity are included in the purchaser's
results from the date of acquisition; whereas, under the pooling-of-interests
method, all periods prior to the combination are restated to show the combined
historical results of the entities being pooled.
Accounting for the acquisition of Northstar under the purchase method
resulted in an additional amount being allocated to the oil and gas properties
acquired. Such higher costs of capital assets resulted in a corresponding
increase in the provision for depletion.
(b) Under the full cost method of accounting, as prescribed by the U.S.
Securities and Exchange Commission, the costs capitalized in a cost center are
limited to an amount equal to the present value of future net revenues from
proved reserves discounted at 10 percent plus the lower of cost or estimated
fair value of
FS-17
<PAGE> 193
NORTHSTAR ENERGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
unproven properties. Under Canadian GAAP, future net revenue is not discounted
but projected financing and general and administration costs are deducted. Due
to this difference, the Northstar acquisition being accounted for as a purchase
and significant oil and gas price declines, an adjustment to reflect a reduction
in the carrying amount of oil and gas property costs at December 31, 1997 and
1995 was required under U.S. GAAP. Additionally, an adjustment to reflect
Northstar's share of a reduction in the carrying amount of oil and gas property
costs of Mountain Energy, Inc., an equity investee of Northstar was required in
1997.
The reductions to the carrying amount of oil and gas property costs in 1997
and 1995, along with reductions that were also required in 1994 and 1991,
resulted in decreases to Northstar's historical provisions for depreciation and
depletion expense in periods subsequent to the write-downs.
(c) U.S. GAAP requires the use of the liability method of accounting for
income taxes. Under this method, deferred income taxes are recognized, at
current enacted rates, to reflect the expected future tax consequences arising
from the differences between the financial statement basis and tax basis of
assets and liabilities. Under Canadian GAAP, deferred income taxes are accounted
for using the deferred method.
Effective January 1, 1993, Morrison adopted the liability method for
reporting income taxes under SFAS 109 for U.S. GAAP purposes. This change
resulted in a reduction of deferred income taxes and a corresponding increase in
retained earnings.
(d) U.S. GAAP requires that an interest in a corporate joint venture of
which a joint venturer exercises significant influence, but which is not
controlled by the venturer, be accounted for under the equity method of
accounting. Under Canadian GAAP, such investments are accounted for using the
proportionate consolidation method.
(e) U.S. GAAP requires that gains and losses arising from the translation
of all long-term monetary assets and liabilities denominated in foreign
currencies be recognized in earnings in the periods in which such gains or
losses occur. Under Canadian GAAP, foreign exchange gains and losses on the
translation of long-term monetary assets and liabilities with a fixed and
ascertainable life extending beyond the following year are not recognized in
earnings immediately, but are amortized on a systematic and rational basis over
the remaining life of the related asset or liability.
(f) Basic earnings per share under Canada GAAP and U.S. GAAP are calculated
in the same manner. Diluted earnings per share under U.S. GAAP reflects the
potential dilution that could occur if options were exercised (calculated using
the treasury stock method) or if convertible securities were converted to common
stock. Potential dilution under Canadian GAAP is not based on the treasury stock
method.
FS-18
<PAGE> 194
NORTHSTAR ENERGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The following presents material differences between Canadian GAAP and U.S.
GAAP balance sheet presentation.
CAPITAL ASSETS
<TABLE>
<CAPTION>
DECEMBER 31,
JUNE 30, ----------------------
1998 1997 1996
----------- ---------- ---------
(UNAUDITED)
<S> <C> <C> <C>
As reported, Canadian GAAP............................... $1,024,171 $1,037,350 $ 875,226
Accounting for Morrison transaction under the purchase
method(a).............................................. 423,408 388,384 (363,224)
Adjustment in carrying value of properties(b)............ (998,412) (998,412) (149,672)
Adjustment to account for interest in oil and gas
corporation under equity method of accounting(d)....... (47,319) (48,897) (43,434)
Adjustment for other differences......................... (11,764) (10,438) (8,389)
---------- ---------- ---------
Capital assets, U.S. GAAP................................ $ 390,084 $ 367,987 $ 310,507
========== ========== =========
STOCKHOLDER'S EQUITY
Reconciliation of stockholders' equity:
Total stockholders' equity under Canadian GAAP......... $ 426,563 $ 392,095 $ 638,072
Accounting for Morrison transaction under the purchase
method(a)........................................... 315,910 315,376 (264,178)
Adjustment in carrying value of properties(b).......... (640,072) (624,450) (83,079)
Adjustment to account for interest in oil and gas
corporation under equity method of accounting(d).... (11,092) (10,473) (635)
Adjustment for conversion to US GAAP method for
accounting for income taxes(c)...................... 13,473 7,957 (6,829)
Adjustment to record foreign currency transaction gains
and losses in accordance with U.S. GAAP(e).......... (14,813) (4,801) (693)
---------- ---------- ---------
Total stockholders' equity under U.S. GAAP..... $ 89,969 $ 75,704 $ 282,658
========== ========== =========
</TABLE>
SHARE CAPITAL
The following information would have been presented on the face of the balance
sheet:
The common shares had no par value at June 30, 1998.
An unlimited number of common shares were authorized at June 30, 1998.
Common shares issued were as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
JUNE 30, -----------------------
1998 1997 1996
----------- ---------- ----------
(UNAUDITED)
<S> <C> <C> <C>
68,287,338 67,963,722 45,687,565
</TABLE>
FS-19
<PAGE> 195
NORTHSTAR ENERGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The following reconciles differences between Canadian GAAP and U.S. GAAP
statement of earnings presentation.
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
------------------------- -------------------------------
1998 1997 1997 1996 1995
----------- ----------- --------- -------- --------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
Net earnings, as reported............. $32,705 $ 40,982 $ 50,065 $ 62,062 $ 36,578
Decrease for Morrison transaction
under the purchase method(a)........ (40,147) (23,903) (51,969) $(43,357) (27,111)
Write-down of oil and gas assets
required under U.S. ceiling
test(b)............................. -- -- (865,883) -- (133,015)
Decrease in depletion and depreciation
expense due to prior periods'
write-downs of oil and gas assets
required under U.S. ceiling
test(b)............................. 35,025 9,175 17,143 18,688 4,102
Decrease for adjustment to account for
interest in oil and gas corporation
under the equity method of
accounting including share of
write-down of investee(d)........... (619) (8,368) (9,838) (635) --
Adjustment for foreign currency
transaction losses(e)............... (10,012) (369) (4,108) (272) (421)
Tax effect of above adjustments....... (9,964) 3,031 330,281 9,067 65,223
Decrease for conversion to U.S. GAAP
method for accounting for income
taxes(c)............................ 5,515 3,300 14,814 (803) (715)
------- -------- --------- -------- --------
Net earnings (loss) in accordance with
U.S. GAAP........................... $12,503 $ 23,848 $(519,495) $ 44,750 $(55,359)
======= ======== ========= ======== ========
Net earnings per common share:
Basic............................... $ 0.18 $ 0.35 $ (8.24) $ 0.99 $ (1.25)
Diluted............................. $ 0.18 $ 0.35 $ (8.24) $ 0.99 $ (1.25)
</TABLE>
Basic earnings per share under Canada GAAP and U.S. GAAP are calculated in
the same manner. Diluted earnings per share under U.S. GAAP reflect the
potential dilution that could occur if options were exercised (calculated using
the treasury stock method) or if convertible securities were converted to common
stock. Potential dilution under Canadian GAAP is not based on the treasury stock
method.
For U.S. reporting, the information contained in the consolidated statement
of operations and retained earnings would be combined to develop a complete
statement of shareholders' equity.
FS-20
<PAGE> 196
NORTHSTAR ENERGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The effect of U.S. GAAP on retained earnings would be as follows:
<TABLE>
<S> <C>
Retained earnings under Canadian GAAP, December 31, 1994.... $ 152,908
Impact of purchase accounting treatment for business
combination with Morrison.................................
December 31, 1995......................................... (48,804)
Decrease for cumulative effect of write-down of oil and gas
assets under U.S. ceiling test............................ (21,975)
Decrease for conversion to U.S. GAAP method for accounting
for income taxes(c)....................................... (5,311)
---------
Retained earnings at December 31, 1994 restated under U.S.
GAAP...................................................... 76,818
Net income (loss) under U.S. GAAP for the years ended:
December 31, 1995........................................... (55,359)
December 31, 1996........................................... 44,750
December 31, 1997........................................... (519,495)
Dividends paid.............................................. (5,105)
---------
Retained earnings (deficit) at December 31, 1997 under U.S.
GAAP...................................................... (458,391)
Net income under U.S. GAAP for the six months ended June 30,
1998 (unaudited).......................................... 12,503
---------
Retained earnings (deficit) at June 30, 1998 restated under
U.S. GAAP (unaudited)..................................... $(445,888)
=========
</TABLE>
The U.S. GAAP cash flows would be as follows:
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
------------------------- ---------------------------------
1998 1997 1997 1996 1995
----------- ----------- --------- --------- ---------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
Cash flows from operating
activities under Canadian
GAAP.......................... $ 49,127 68,527 $ 170,885 $ 200,776 $ 147,286
- - Reclassification of certain
financing and investing
activities to operating
activities.................... (1,305) (1,932) (4,898) (6,738) 5,748
- - Accounting for Morrison
transaction under purchase
method........................ -- (33,022) (33,022) (113,357) (69,630)
- - Adjustment to account for oil
and gas company under equity
method of accounting.......... (6,259) (3,435) (10,943) (2,141) --
-------- --------- --------- --------- ---------
Cash flows from operating
activities under U.S. GAAP.... 41,563 30,138 122,022 78,540 83,404
-------- --------- --------- --------- ---------
Cash flows from investing
activities under Canadian
GAAP.......................... 21,499 120,458 (42,100) (366,984) (368,264)
- - Accounting for Morrison
transaction under purchase
method........................ -- 24,300 46,471 117,940 174,440
- - Reclassification of certain
investing activities to
operating activities.......... 1,362 248 2,404 953 585
- - Adjustment to account for oil
and gas company under equity
method of accounting.......... 6,259 3,435 (11,999) 973 --
-------- --------- --------- --------- ---------
Cash flows from investing
activities under U.S. GAAP.... 29,120 148,441 (5,224) (247,118) (193,239)
-------- --------- --------- --------- ---------
Cash flows from financing
activities under Canadian
GAAP.......................... (70,626) (222,844) (162,644) 190,189 208,283
</TABLE>
FS-21
<PAGE> 197
NORTHSTAR ENERGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
------------------------- ---------------------------------
1998 1997 1997 1996 1995
----------- ----------- --------- --------- ---------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
- - Reclassification of certain
financing activities to
operating activities.......... (57) 1,684 2,494 5,785 (6,333)
- - Accounting for Morrison
transaction under purchase
method........................ -- 13,492 14,189 (31,774) (99,347)
- - Adjustment to account for oil
and gas company under equity
method of accounting.......... -- -- 74 -- --
-------- --------- --------- --------- ---------
Cash flows from financing
activities under U.S. GAAP.... (70,683) (207,668) (145,887) 164,200 102,603
-------- --------- --------- --------- ---------
</TABLE>
Cash flows reported under U.S. GAAP differ from those reported under
Canadian GAAP in certain respects.
Site restoration costs and deferred revenue which are shown as investing
and financing activities, respectively, under Canadian GAAP are shown as
operating activities under U.S. GAAP.
Changes in activities related to a corporate joint venture which is
accounted for using the proportionate consolidation method under Canadian GAAP
have been removed and restated to reflect accounting for the investment under
the equity method of accounting for U.S. GAAP purposes.
Under Canadian GAAP, the Morrison combination has been shown as a
pooling-of-interests. For U.S. GAAP, this transaction has been accounted for as
a purchase.
NOTE 14 -- RECLASSIFICATION OF THE PRIOR YEAR'S BALANCES
Certain balances from the prior year's consolidated financial statements
have been reclassified to conform with the current year's presentation.
FS-22
<PAGE> 198
ANNEX A
FORM OF ARRANGEMENT RESOLUTION
RESOLUTION FOR CONSIDERATION AT THE SPECIAL MEETING
OF SHAREHOLDERS AND OPTIONHOLDERS
OF
NORTHSTAR ENERGY CORPORATION
("NORTHSTAR")
BE IT RESOLVED THAT:
1. The arrangement (the "Arrangement") under section 186 of the Business
Corporations Act (Alberta) (the "ABCA"), involving Northstar and Devon Energy
Corporation ("Devon"), which is set forth in Annex E to the Joint Management
Information Circular and Proxy Statement of Northstar and Devon dated November
6, 1998 (the "Joint Management Information Circular and Proxy Statement") (as
the same may be or may have been amended and presented to this meeting), is
hereby authorized, approved and adopted;
2. Conditional upon the Arrangement becoming effective, the delisting of
the common shares of Northstar on The Toronto Stock Exchange, the Montreal
Exchange and The Alberta Stock Exchange be and the same is hereby approved and
authorized;
3. Notwithstanding the passing of this resolution by the Northstar
Shareholders and Northstar Optionholders (each as defined in the Joint
Management Information Circular and Proxy Statement) or the approval of the
Court of Queen's Bench of Alberta, the board of directors of Northstar, without
further notice to or approval of the Northstar Shareholders and Northstar
Optionholders, may: (i) amend or terminate the Arrangement; (ii) decide not to
proceed with the Arrangement; or (iii) revoke this resolution at any time prior
to the Arrangement becoming effective pursuant to the provisions of the ABCA;
and
4. Any director or officer of Northstar is hereby authorized and directed
for and on behalf of Northstar to execute or cause to be executed, under
corporate seal or otherwise, and to deliver or cause to be delivered all such
documents, agreements and instruments and to do or cause to be done all such
other acts and things as such director or officer of Northstar shall determine
to be necessary or desirable in order to carry out the intent of the foregoing
paragraphs of this resolution and the matters authorized thereby, such
determination to be conclusively evidenced by the execution and delivery of such
document, agreement or instrument or the doing of any such act or thing.
A-1
<PAGE> 199
ANNEX B
AMENDED AND RESTATED
COMBINATION AGREEMENT
DEVON ENERGY CORPORATION
AND
NORTHSTAR ENERGY CORPORATION
DATED AS OF JUNE 29, 1998
B-1
<PAGE> 200
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
ARTICLE 1
GENERAL..................................................... B-4
1.1 Plan of Arrangement................................... B-4
1.2 Adjustments to Exchange Ratio......................... B-4
1.3 Dissenting Shares..................................... B-5
1.4 Other Effects of the Arrangement...................... B-5
1.5 Restated Devon Charter................................ B-5
1.6 Joint Proxy Statement; Registration Statement......... B-5
1.7 Material Adverse Effect............................... B-6
1.8 Currency.............................................. B-6
ARTICLE 2
REPRESENTATIONS AND WARRANTIES OF NORTHSTAR................. B-7
2.1 Organization and Standing............................. B-7
2.2 Agreement Authorized and its Effect on Other B-7
Obligations...............................................
2.3 Governmental and Third Party Consents................. B-8
2.4 Capitalization........................................ B-8
2.5 Securities Reports and Financial Statements, Books and B-9
Records...................................................
2.6 Liabilities........................................... B-10
2.7 Information Supplied.................................. B-10
2.8 No Defaults........................................... B-10
2.9 Litigation; Investigations............................ B-10
2.10 Absence of Certain Changes and Events................. B-10
2.11 Additional Northstar Information...................... B-11
2.12 Certain Agreements.................................... B-11
2.13 Employee Benefit Plans................................ B-12
2.14 Intellectual Property................................. B-12
2.15 Title to Properties................................... B-12
2.16 Environmental Matters................................. B-13
2.17 Compliance With Other Laws............................ B-13
2.18 Taxes................................................. B-14
2.19 Brokers and Finders................................... B-14
2.20 Disclosure............................................ B-14
2.21 Fairness Opinion...................................... B-14
2.22 Restrictions on Business Activities................... B-14
2.23 Year 2000............................................. B-15
ARTICLE 3
REPRESENTATIONS AND WARRANTIES OF DEVON..................... B-15
3.1 Organization and Standing............................. B-15
3.2 Agreement Authorized and its Effect on Other B-15
Obligations...............................................
3.3 Governmental and Third Party Consents................. B-16
3.4 Capitalization........................................ B-16
3.5 Securities Reports and Financial Statements, Books and B-17
Records...................................................
3.6 Liabilities........................................... B-17
3.7 Information Supplied.................................. B-17
3.8 No Defaults........................................... B-18
3.9 Litigation; Investigations............................ B-18
3.10 Absence of Certain Changes and Events................. B-18
3.11 Additional Devon Information.......................... B-19
3.12 Certain Agreements.................................... B-19
</TABLE>
B-2
<PAGE> 201
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
3.13 Employee Benefit Plans................................ B-19
3.14 Intellectual Property................................. B-20
3.15 Title to Properties................................... B-20
3.16 Environmental Matters................................. B-21
3.17 Compliance With Other Laws............................ B-21
3.18 Taxes................................................. B-21
3.19 Brokers and Finders................................... B-22
3.20 Disclosure............................................ B-22
3.21 Fairness Opinion...................................... B-22
3.22 Restrictions on Business Activities................... B-22
3.23 Year 2000............................................. B-22
3.24 Devon Rights Agreement................................ B-22
ARTICLE 4
OBLIGATIONS PENDING EFFECTIVE DATE.......................... B-23
4.1 Agreements of Devon and Northstar..................... B-23
4.2 Additional Agreements of Northstar.................... B-24
4.3 Additional Agreements of Devon........................ B-26
4.4 Public Announcements.................................. B-27
4.5 Comfort Letters....................................... B-27
4.6 Board of Directors.................................... B-28
ARTICLE 5
CONDITIONS PRECEDENT TO OBLIGATIONS......................... B-28
5.1 Conditions Precedent to Obligations of Each Party..... B-28
5.2 Conditions Precedent to Obligations of Northstar...... B-29
5.3 Conditions Precedent to Obligations of Devon.......... B-30
ARTICLE 6
TERMINATION................................................. B-30
6.1 Termination........................................... B-30
6.2 Notice of Termination................................. B-31
6.3 Effect of Termination................................. B-31
6.4 Termination Fee....................................... B-31
ARTICLE 7
ADDITIONAL AGREEMENTS....................................... B-32
7.1 Meetings.............................................. B-32
7.2 The Closing........................................... B-32
7.3 Ancillary Documents/Reservation of Shares............. B-32
7.4 Conversion of Options................................. B-33
7.5 Indemnification and Related Matters................... B-33
7.6 Affiliate and Shareholders Agreements................. B-34
ARTICLE 8
MISCELLANEOUS............................................... B-35
8.1 No Survival of Representations and Warranties......... B-35
8.2 Notices............................................... B-35
8.3 Interpretation........................................ B-35
8.4 Severability.......................................... B-35
8.5 Counterparts.......................................... B-35
8.6 Miscellaneous......................................... B-35
8.7 Governing Law......................................... B-36
8.8 Amendment and Waivers................................. B-36
8.9 Expenses.............................................. B-36
</TABLE>
B-3
<PAGE> 202
AMENDED AND RESTATED COMBINATION AGREEMENT
THIS COMBINATION AGREEMENT (as amended, this "Agreement") is entered into
as of June 29, 1998, between Devon Energy Corporation, an Oklahoma corporation
("Devon"), and Northstar Energy Corporation, an Alberta corporation
("Northstar").
RECITALS
WHEREAS, the respective boards of directors of Devon and Northstar each
deem it advisable and in the best interests of their respective stockholders to
combine their respective businesses by Devon acquiring common shares of
Northstar pursuant to the Plan of Arrangement (as hereinafter defined).
WHEREAS, in furtherance of such combination, the respective boards of
directors of Devon and Northstar have approved the transactions contemplated by
this Agreement, the board of directors of Northstar has agreed to submit the
Plan of Arrangement and the other transactions contemplated hereby to its
shareholders and optionholders (together, "securityholders") and the Court of
Queen's Bench of Alberta (the "Court") for approval, and the board of directors
of Devon has agreed to submit the transactions contemplated hereby to its
stockholders for approval.
WHEREAS, it is intended that the transactions contemplated hereby will be
treated as a "pooling of interests" under United States generally accepted
accounting principles.
NOW, THEREFORE, in consideration of the premises and of the
representations, warranties, covenants and agreements herein contained, the
parties hereto, intending to be legally bound, agree as follows:
ARTICLE 1
GENERAL
1.1 PLAN OF ARRANGEMENT
As promptly as practicable after the preliminary Joint Proxy Statement (as
hereinafter defined) is cleared by the United States Securities and Exchange
Commission (the "SEC"), Northstar will apply to the Court pursuant to Section
186 of the Business Corporations Act (Alberta) (the "ABCA") for an interim order
in form and substance reasonably satisfactory to Devon (the "Interim Order")
providing for, among other things, the calling and holding of the Northstar
Shareholders Meeting (as hereinafter defined) for the purpose of considering
and, if deemed advisable, approving the arrangement (the "Arrangement") under
Section 186 of the ABCA and pursuant to this Agreement and the Plan of
Arrangement substantially in the form of Exhibit A (the "Plan of Arrangement").
If the Northstar securityholders approve the Arrangement and all necessary
approvals of Devon Stockholders have been obtained, Northstar will take the
necessary steps to submit the Arrangement to the Court and apply for a final
order of the Court approving the Arrangement in such fashion as the Court may
direct (the "Final Order"). At 12:01 a.m. (the "Effective Time") on the date
(the "Effective Date") shown on the articles of arrangement filed with the
Registrar under the ABCA (which articles of arrangement will not be filed with
the Registrar under the ABCA during any 15 day cure period referred to in
Section 6.1(b) or (c) hereof) giving effect to the Arrangement and other
transactions set out in clauses (a) through (k), inclusive, of Section 2.1 of
the Plan of Arrangement shall occur and shall be deemed to occur in the
following order without any further act or formality.
1.2 ADJUSTMENTS TO EXCHANGE RATIO
a. If the weighted average trading price of shares of Devon Common Stock on
the American Stock Exchange (the "AMEX") (as reported by the AMEX converted, as
herein provided, to Canadian dollars and expressed to the fourth decimal place)
during the period (the "Measurement Period") of 10 consecutive trading days
ending on the second trading day prior to the first to occur of the date of the
Devon Stockholders Meeting or the Northstar Shareholders Meeting (the
"Pre-Meeting Average Price") multiplied by 0.227 shall be less than $11.00
(Canadian) per share, the Exchange Ratio (as defined in the Plan of Arrangement)
shall
B-4
<PAGE> 203
be adjusted to the lesser of: (A) 0.235; or (B) the number obtained by dividing
$11.00 (Canadian) by the Pre-Meeting Average Price. For the purposes of this
adjustment, the U.S. dollar/Canadian dollar exchange rate for determining the
Pre-Meeting Average Price shall be based upon the average of the noon buying
rate (expressed to the fourth decimal place) for each of the days in the
Measurement Period, as reported by the Federal Reserve Bank of New York. For
this purpose, "weighted average trading price" shall be determined by dividing
the aggregate sale price of all shares of Devon Common Stock sold on AMEX during
the Measurement Period by the total number of shares of Devon Common Stock sold.
b. The Exchange Ratio (as defined in the Plan of Arrangement) shall also be
adjusted to reflect fully the effect of any stock split, reverse split, stock
dividend (including any dividend or distribution of securities convertible into
Devon Common Stock or Northstar Common Shares), reorganization, recapitalization
or other like change with respect to Devon Common Stock or Northstar Common
Shares occurring after the date hereof and prior to the Effective Time.
1.3 DISSENTING SHARES
Holders of Northstar Common Shares and options to acquire Northstar Common
Shares ("Northstar Options") may exercise rights of dissent with respect to such
shares in connection with the Arrangement pursuant to and in the manner set
forth in Section 184 of the ABCA and Section 3.1 of the Plan of Arrangement
(such holders referred to as "Dissenters" or as "Dissenting Shareholders" when
referring exclusively to Northstar Shareholders). Northstar shall give Devon (i)
prompt notice of any written demands of a right of dissent, withdrawals of such
demands, and any other instruments served pursuant to the ABCA and received by
Northstar and (ii) the opportunity to participate in all negotiations and
proceedings with respect to such rights. Without the prior written consent of
Devon, except as required by applicable law, Northstar shall not make any
payment with respect to any such rights or offer to settle or settle any such
rights.
1.4 OTHER EFFECTS OF THE ARRANGEMENT
At the Effective Time: (a) each Northstar Common Share and each Northstar
Option outstanding immediately prior to the Effective Time will be exchanged as
provided in the Plan of Arrangement; and (b) the Arrangement will, from and
after the Effective Time, have all of the effects provided by applicable law,
including the ABCA.
1.5 RESTATED DEVON CHARTER
Prior to the Closing, Devon shall have restated its Certificate of
Incorporation to include the provisions set forth in Exhibit B and to modify or
delete any provisions, if any, which are inconsistent with such provisions (the
"Restated Devon Charter").
1.6 JOINT PROXY STATEMENT; REGISTRATION STATEMENT
a. As promptly as practicable after execution of this Agreement, Devon and
Northstar shall prepare and Devon shall file with the SEC a preliminary joint
management information circular and proxy statement (the "Joint Proxy
Statement"), together with any other documents required by the Securities Act of
1933, as amended (the "Securities Act"), or the Securities Exchange Act of 1934,
as amended (the "Exchange Act"), in connection with the Arrangement and the
other transactions contemplated hereby. The Joint Proxy Statement shall
constitute (i) the management information circular of Northstar with respect to
the meeting of securityholders of Northstar relating to the Arrangement and the
approval of certain matters in connection therewith (the "Northstar Shareholders
Meeting") and (ii) the proxy statement of Devon with respect to the meeting of
stockholders of Devon with respect to the issuance of Devon Common Stock from
time to time upon exchange of the Exchangeable Shares and certain other matters
(including the approval of the Restated Devon Charter) relating to the
agreements of Devon contained herein (the "Devon Stockholders Meeting"). As
promptly as practicable after the preliminary Joint Proxy Statement is cleared
by the SEC, Devon and Northstar shall cause the Joint Proxy Statement to be
mailed to each company's respective securityholders
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entitled to vote, as the case may be. As promptly as practicable, Devon shall
file a registration statement (the "Registration Statement") with the SEC to
register the Devon Common Stock to be issued from time to time after the
Effective Time upon exchange of the Exchangeable Shares and Devon and Northstar
shall use their best efforts to cause the Registration Statement to become
effective prior to the mailing of the Joint Proxy Statement. If such
Registration is filed and becomes effective, Devon will use its best efforts to
maintain the effectiveness of the Registration Statement for so long as any
Exchangeable Shares remain outstanding or until such earlier time as Devon
determines to be necessary on the written advice of its outside counsel, which
advice will be based on a no-action letter from the SEC or upon rules,
regulations, other published no-action letters or judicial decisions relating to
the substantially similar transactions.
b. Each party shall promptly furnish to the other party all information
concerning such party and its securityholders as may be reasonably required in
connection with any action contemplated by this Section 1.6. The Joint Proxy
Statement and the Registration Statement, shall comply in all material respects
with all applicable requirements of law. Each of Devon and Northstar will notify
the other promptly of the receipt of any comments from the SEC and of any
request by the SEC for amendments or supplements to the Joint Proxy Statement or
the Registration Statement, or for additional information, and will supply the
other with copies of all correspondence with the SEC with respect to the Joint
Proxy Statement or the Registration Statement. Whenever any event occurs which
should be set forth in an amendment or supplement to the Joint Proxy Statement
or the Registration Statement, Devon or Northstar, as the case may be, shall
promptly inform the other of such occurrence and cooperate in filing with the
SEC, and/or mailing to securityholders entitled to vote of Devon and Northstar,
as may be applicable, such amendment or supplement.
c. Devon and Northstar shall take any action required to be taken under any
applicable provincial or state securities laws (including "blue sky" laws) in
connection with the issuance of the Devon Common Stock and the Arrangement;
provided, however, that with respect to the blue sky and Canadian provincial
qualifications, neither Devon nor Northstar shall be required to register or
qualify as a foreign corporation or reporting issuer where any such entity is
not now so registered or qualified except as to matters and transactions arising
solely from the offer and sale of the Devon Common Stock or the issuance of the
Exchangeable Shares.
1.7 MATERIAL ADVERSE EFFECT
In this Agreement, the term "Material Adverse Effect" used with respect to
any party means any event, change or effect that:
a. is materially adverse to the financial condition, properties or
business of such party and its subsidiaries, taken as a whole; and
b. in the opinion of the board of directors of the other party, could
reasonably be expected to reduce the market price or value of the party's
common shares or common stock, as the case may be, by more than 10%,
provided, that a Material Adverse Effect shall not include any decline in crude
oil or natural gas prices, any change in U.S. or Canadian dollar currency
valuations or exchange rates or any adverse effect resulting from changes in
general economic conditions or conditions generally affecting the industries in
which Devon or Northstar operate.
1.8 CURRENCY
Unless otherwise specified, all references in this Agreement to "dollars"
or "$" shall mean United States dollars.
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ARTICLE 2
REPRESENTATIONS AND WARRANTIES OF NORTHSTAR
Except as set forth in a letter dated the date of this Agreement and
delivered by Northstar to Devon concurrently herewith (the "Northstar Disclosure
Letter"), Northstar hereby represents and warrants to, and agrees with, Devon
that:
2.1 ORGANIZATION AND STANDING
Northstar and each body corporate, partnership, joint venture, association
or other business entity of which more than 50% of the total voting power of
shares of stock or units of ownership or beneficial interest entitled to vote in
the election of directors (or members of a comparable governing body) is owned
or controlled, directly or indirectly, by Northstar (the "Northstar
Subsidiaries"), is an entity duly organized, validly existing and in good
standing under the laws of the jurisdiction of its incorporation or
organization, has full requisite power and authority to carry on its business as
it is currently conducted, and to own, lease and operate the properties
currently owned, leased and operated by it, and is duly qualified or licensed to
do business and is in good standing as a foreign corporation or organization
authorized to do business in all jurisdictions in which the character of the
properties owned or leased or the nature of the business conducted by it would
make such qualification or licensing necessary, except where the failure to be
so qualified or licensed would not have a Material Adverse Effect on Northstar.
The Northstar Disclosure Letter sets forth a complete list, as at the date
hereof, of the Northstar Subsidiaries with assets or liabilities greater than $1
million and the percentage of each subsidiary's outstanding capital stock or
other ownership interest owned by Northstar or another Northstar Subsidiary.
2.2 AGREEMENT AUTHORIZED AND ITS EFFECT ON OTHER OBLIGATIONS
a. Northstar has all requisite corporate power and authority to enter into
this Agreement and to perform its obligations hereunder and, subject to approval
of Northstar's securityholders and the Court as provided in this Agreement, to
consummate the Arrangement and the other transactions contemplated by this
Agreement. The execution and delivery of this Agreement by Northstar and,
subject to approval of Northstar's securityholders and the Court as provided in
this Agreement, the consummation by Northstar of the Arrangement and the other
transactions contemplated hereby have been unanimously approved by the board of
directors of Northstar and have been duly authorized by all other necessary
corporate action on the part of Northstar. This Agreement has been duly executed
and delivered by Northstar and is a valid and binding obligation of Northstar,
enforceable in accordance with its terms, except that such enforceability may be
subject to (i) bankruptcy, insolvency, reorganization or other similar laws
affecting or relating to enforcement of creditors' rights generally and (ii)
general equitable principles, and that the consummation of the Arrangement is
subject to approval of Northstar's securityholders and the Court as provided in
this Agreement.
b. Neither the execution, delivery or performance of this Agreement or the
Arrangement by Northstar, nor the consummation of the transactions contemplated
hereby or thereby by Northstar nor compliance with the provisions hereof or
thereof by Northstar will: (i) conflict with, or result in any violations of,
the articles of amalgamation or bylaws of Northstar or any equivalent document
of any of the Northstar Subsidiaries, (ii) result in any breach of or cause a
default (with or without notice or lapse of time, or both) under, (iii) give
rise to a right of termination, amendment, cancellation or acceleration of any
obligation contained in, or the loss of any material benefit under, or (iv)
result in the creation of any lien, charge, mortgage, security interest, option,
preferential purchase right or other right or interest of any other person
(collectively, an "Encumbrance") upon any of the material properties or assets
of Northstar or any of the Northstar Subsidiaries under, any term, condition or
provision of any loan or credit agreement, note, bond, mortgage, indenture,
lease or other agreement, judgment, order, decree, statute, law, ordinance, rule
or regulation applicable to Northstar or any of the Northstar Subsidiaries or
their respective properties or assets, other than any such breaches, defaults,
rights, losses, or Encumbrances which, individually or in the aggregate, would
not have a Material Adverse Effect on Northstar.
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2.3 GOVERNMENTAL AND THIRD PARTY CONSENTS
a. No consent, approval, order or authorization of, or registration,
declaration or filing with, any court, administrative agency or commission or
other governmental authority or instrumentality, domestic or foreign (each a
"Governmental Entity"), is required to be obtained by Northstar or any of the
Northstar Subsidiaries in connection with the execution and delivery of this
Agreement or the Plan of Arrangement or the consummation of the transactions
contemplated hereby or thereby, except for: (i) the filing with the applicable
Canadian provincial securities commissions or regulatory authorities (the
"Commissions") and the Court and the mailing to securityholders of Northstar of
the Joint Proxy Statement relating to the Northstar Shareholders Meeting; (ii)
the furnishing to the SEC of such reports and information under the Exchange Act
and the rules and regulations promulgated by the SEC thereunder, as may be
required in connection with this Agreement and the transactions contemplated
hereby (the "SEC Filings"); (iii) approval by the Court of the Arrangement and
the filings of the articles of arrangement and other required arrangement or
other documents as required by the ABCA; (iv) such filings, authorizations,
orders and approvals as may be required under state "control share acquisition,"
"anti-takeover" or other similar statutes, any other applicable federal,
provincial or state securities laws and the rules of the America Stock Exchange
(the "AMEX"), The Toronto Stock Exchange ("TSE"), the Montreal Exchange or The
Alberta Stock Exchange; (v) such filings and notifications as may be necessary
under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended (the
"HSR Act"); (vi) such notices and filings as may be necessary under the
Investment Canada Act and under the Competition Act (Canada); (vii) such notice,
filings, orders and approvals as may be necessary under the Public Utilities
Board Act (Alberta), Gas Utilities Act (Alberta) or similar legislation in other
applicable provinces; and (viii) where the failure to obtain such consents,
approvals, etc., would not prevent or delay the consummation of the Arrangement
or otherwise prevent Northstar from performing its obligations under this
Agreement and would not reasonably be expected to have a Material Adverse Effect
on Northstar.
b. Other than as contemplated by Section 2.3(a), no consents, assignments,
waivers, authorizations or other certificates are necessary in connection with
the transactions contemplated hereby to provide for the continuation in full
force and effect of all of Northstar's material contracts or leases or for
Northstar to consummate the transactions contemplated hereby, except when the
failure to receive such consents or other certificates would not have a Material
Adverse Effect on Northstar.
2.4 CAPITALIZATION
a. The authorized capital of Northstar consists of an unlimited number of
common shares ("Northstar Common Shares"), 100,000,000 First Preferred Shares
and 100,000,000 Second Preferred Shares. As of June 29, 1998, 68,287,338
Northstar Common Shares were issued and outstanding and no First Preferred
Shares or Second Preferred Shares are issued and outstanding. As of June 29,
1998, an aggregate of 5,326,126 Northstar Common Shares were reserved for
issuance pursuant to outstanding Northstar Options granted under the Northstar
Option Plan (which includes those outstanding under the converted Morrison
Petroleums Ltd. options) and, as at such date, no other Northstar Shares are
reserved for issuance pursuant to any outstanding rights or options and no First
Preferred Shares or Second Preferred Shares are reserved for issuance. Prior to
the date hereof, 2,263,194 of the Northstar Options have vested in accordance
with their terms and 3,062,932 remain unvested. The consummation of the
transactions contemplated by this Agreement will accelerate the vesting of any
unvested Northstar Options. All of the issued and outstanding Northstar Common
Shares have been duly authorized and validly issued, are fully paid and
non-assessable, were not issued in violation of the terms of any agreement or
other understanding binding upon Northstar and were issued in compliance with
all applicable charter documents of Northstar and all applicable federal,
provincial and foreign securities laws, rules and regulations. There are, and
have been, no preemptive rights with respect to the issuance of the Northstar
Common Shares or any other capital stock of Northstar.
b. Other than as set forth above, there are no outstanding subscriptions,
options, warrants, convertible securities, calls, commitments, agreements or
rights (contingent or otherwise) of any character to purchase or otherwise
acquire from Northstar any shares of, or any securities convertible into, the
capital stock of Northstar.
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c. Northstar does not have a shareholders rights protection plan or similar
plan or agreement.
2.5 SECURITIES REPORTS AND FINANCIAL STATEMENTS, BOOKS AND RECORDS
a. Northstar has filed all forms, reports and documents with the
Commissions required to be filed by it pursuant to relevant Canadian securities
statutes, regulations, policies and rules (collectively, the "Northstar Canadian
Securities Reports"), all of which have complied in all material respects with
all applicable requirements of such statutes, regulations, policies and rules.
None of the Northstar Canadian Securities Reports, at the time filed or as
subsequently amended, contained any untrue statement of a material fact or
omitted to state a material fact required to be stated therein or necessary in
order to make the statements made therein, in light of the circumstances under
which they were made, not misleading. The financial statements of Northstar
contained in the Northstar Canadian Securities Reports complied in all material
respects with the then applicable accounting requirements and the published
rules and regulations of the relevant Canadian securities statutes with respect
thereto, were prepared in accordance with Canadian generally accepted accounting
principles applied on a consistent basis during the periods involved (except as
may have been indicated in the notes thereto or, in the case of unaudited
statements, as permitted by applicable laws, rules or regulations) and fairly
present (subject, in the case of the unaudited statements, to normal, year-end
audit adjustments) the consolidated financial position of Northstar and its
consolidated Northstar Subsidiaries as at the respective dates thereof and the
consolidated results of their operations and cash flows for the respective
periods then ended.
b. Northstar has filed all forms, reports and documents with the SEC
required to be filed by it pursuant to relevant United States securities
statutes, regulations, policies and rules (collectively, the "Northstar United
States Securities Reports"; and together with the Northstar Canadian Securities
Reports, the "Northstar Securities Reports"), all of which have complied in all
material respects with all applicable requirements of such statutes,
regulations, policies and rules. None of the Northstar United States Securities
Reports, at the time filed or as subsequently amended, contained any untrue
statement of a material fact or omitted to state a material fact required to be
stated therein or necessary in order to make the statements made therein, in
light of the circumstances under which they were made, not misleading. The
financial statements of Northstar contained in the Northstar United States
Securities Reports complied in all material respects with the then applicable
accounting requirements and the published rules and regulations of the relevant
United States securities statutes with respect thereto, were prepared in
accordance with Canadian generally accepted accounting principles applied on a
consistent basis during the periods involved (except as may have been indicated
in the notes thereto or, in the case of unaudited statements, as permitted by
applicable laws, rules or regulations) and fairly present (subject, in the case
of the unaudited statements, to normal, year-end audit adjustments) the
consolidated financial position of Northstar and its consolidated Northstar
Subsidiaries as at the respective dates thereof and the consolidated results of
their operations and cash flows for the respective periods then ended.
c. There has been no change in Northstar's accounting policies or the
methods of making accounting estimates or changes in estimates that are material
to such financial statements, except as described in the notes thereto.
d. The books, records and accounts of Northstar and the Northstar
Subsidiaries (i) have been maintained in accordance with good business practices
on a basis consistent with prior years; (ii) are stated in reasonable detail and
accurately and fairly reflect in all material respects the transactions and
dispositions of the assets of Northstar and the Northstar Subsidiaries; and
(iii) accurately and fairly reflect in all material respects the basis for the
Northstar financial statements. Northstar has devised and maintains a system of
internal accounting controls sufficient to provide reasonable assurances that:
(iv) transactions are executed in accordance with management's general or
specific authorization; and (v) transactions are recorded as necessary: (A) to
permit preparation of financial statements in conformity with Canadian generally
accepted accounting principles or any other criteria applicable to such
statements; and (B) to maintain accountability for assets.
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2.6 LIABILITIES
Neither Northstar nor any Northstar Subsidiary has any material liabilities
or obligations, either accrued, absolute, contingent or otherwise, or has any
knowledge of any potential material liabilities or obligations, other than those
disclosed in the Northstar Securities Reports or incurred in the ordinary course
of business since December 31, 1997.
2.7 INFORMATION SUPPLIED
None of the information supplied or to be supplied by Northstar for
inclusion or incorporation by reference in the Joint Proxy Statement (and, if
filed, the Registration Statement) will, at the time the Joint Proxy Statement
is mailed to the securityholders of Northstar and at the time of the Northstar
Shareholders Meeting (and, if filed, at the time the Registration Statement is
declared effective), contain any untrue statement which, at the time and in
light of the circumstances under which it is made, is false or misleading with
respect to any material fact, or omit to state any material fact required to be
stated therein or necessary in order to make the statements therein not false or
misleading or necessary to correct any statement in any earlier communication
with respect to the solicitation of a proxy for the same meeting or subject
matter which has become false or misleading. The Joint Proxy Statement will
comply as to form in all material respects with the provisions of the ABCA and
applicable United States and Canadian securities laws and the rules and
regulations promulgated thereunder.
2.8 NO DEFAULTS
Neither Northstar nor any Northstar Subsidiary is, or has received notice
that it would be with the passage of time, in default or violation of any term,
condition or provision of (a) its articles or bylaws; (b) any judgment, decree
or order applicable to it; or (c) any loan or credit agreement, note, bond,
mortgage, indenture, contract, agreement, lease, license or other instrument to
which Northstar or any Northstar Subsidiary is now a party or by which it or any
of its properties or assets may be bound, except in the case of item (c) for
defaults and violations which, individually or in the aggregate, would not have
a Material Adverse Effect on Northstar.
2.9 LITIGATION; INVESTIGATIONS
There is no claim, action, suit or proceeding pending, or to the knowledge
of Northstar threatened against Northstar or any of the Northstar Subsidiaries,
which would, if adversely determined, individually or in the aggregate, have a
Material Adverse Effect on Northstar, nor is there any judgment, decree,
injunction, rule or order of any Governmental Entity or arbitrator outstanding
against Northstar or any of the Northstar Subsidiaries having, or which, insofar
as reasonably can be foreseen, in the future could have, any such effect. There
is no investigation pending, or to the knowledge of Northstar threatened,
against Northstar or any of the Northstar Subsidiaries before any Governmental
Entity which could have such effect.
2.10 ABSENCE OF CERTAIN CHANGES AND EVENTS
Other than as a result of the transactions contemplated by this Agreement,
since December 31, 1997, there has not been:
a. Any material adverse change in the financial condition, operations,
assets, liabilities or business of Northstar and the Northstar
Subsidiaries, taken as a whole;
b. Any material damage, destruction, or loss to the business or
properties of Northstar and the Northstar Subsidiaries, taken as a whole,
not covered by insurance;
c. Any declaration, setting aside or payment of any dividend or other
distribution in respect of the capital stock of Northstar, or any direct or
indirect redemption, purchase or any other acquisition by Northstar of any
such stock;
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d. Any change in the capital stock or in the number of shares or
classes of Northstar's authorized or outstanding capital stock as described
in Section 2.4 (other than as a result of exercises of Northstar Options
described in Section 2.4(a));
e. Any material labor dispute or charge of unfair labor practice
(other than routine individual grievances) or, to the knowledge of
Northstar, any activity or proceeding by a labor union or by a
representative thereof to organize any employees of Northstar or any
Northstar Subsidiary or any campaign being conducted to solicit
authorization from employees to be represented by such labor union; or
f. Any other event or condition known to Northstar particularly
pertaining to and adversely affecting the operations, assets or business of
Northstar or any of the Northstar Subsidiaries (other than events or
conditions which are of a general or industry-wide nature and of general
public knowledge) which would constitute a Material Adverse Effect on
Northstar.
2.11 ADDITIONAL NORTHSTAR INFORMATION
The Northstar Disclosure Letter contains true, complete and correct lists
of the following items with respect to Northstar and each of the Northstar
Subsidiaries, and Northstar has furnished or made available to Devon true,
complete and correct copies of all documents referred to in such lists:
a. All contracts which involve, or may involve, aggregate payments by
any party thereto of $5 million or more, which payments or obligations are
to be performed in whole or in part after the Effective Time and which are
not cancellable or terminable by Northstar without payment or penalty in
excess of $500,000;
b. All material option, bonus, incentive compensation, deferred
compensation, employment agreements, profit-sharing, retirement, pension,
welfare, group insurance, death benefit, or other fringe benefit plans,
arrangements or trust agreements;
c. All material patents, trademarks, copyrights and other intellectual
property rights owned, licensed or used and all applications therefor;
d. All material trade names and fictitious names used or held, whether
and where such names are registered and where used;
e. All material long-term and short-term promissory notes, installment
contracts, loan agreements, credit agreements, operating and finance
leases, and any other material agreements relating thereto or with respect
to collateral securing the same; and
f. All material indebtedness, liabilities and commitments of third
parties (other than Northstar Subsidiaries) and as to which it is a
guarantor, endorser, co-maker, surety or accommodation maker, or is
contingently liable therefor (excluding liabilities as an endorser of
checks and the like in the ordinary course of business) or has otherwise
provided any form of financial assistance and all letters of credit in
excess of $100,000, whether stand-by or documentary, issued by any third
party.
2.12 CERTAIN AGREEMENTS
Except for the Northstar employment agreements disclosed under Section
2.11(b) or the acceleration of vesting of Northstar Options, neither the
execution and delivery of this Agreement nor the consummation of the
transactions contemplated hereby will: (a) result in any payment (including
severance, unemployment compensation, parachute payment, bonus or otherwise)
becoming due to any director, employee or independent contractor of Northstar or
any of the Northstar Subsidiaries under any Northstar Plan (as defined in
Section 2.13) or otherwise; (b) materially increase any benefits otherwise
payable under any Northstar Plan or otherwise; or (c) result in the acceleration
of the time of payment or vesting of any such benefits.
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2.13 EMPLOYEE BENEFIT PLANS
All employee benefits plans covering active, former or retired employees of
Northstar and the Northstar Subsidiaries are listed in the Northstar Disclosure
Letter (the "Northstar Plans"). Northstar has made available to Devon true,
complete and correct copies of each Northstar Plan, any related trust agreement,
annuity or insurance contract or other funding vehicle, and:(a) each Northstar
Plan has been maintained and administered in material compliance with its terms
and is, to the extent required by applicable law or contract, fully funded
without having any deficit or unfunded actuarial liability or adequate provision
has been made therefor; (b) all required employer contributions under any such
plans have been made and the applicable funds have been funded in accordance
with the terms thereof; (c) each Northstar Plan that is required or intended to
be qualified under applicable law or registered or approved by a governmental
agency or authority has been so qualified, registered or approved by the
appropriate governmental agency or authority, and nothing has occurred since the
date of the last qualification, registration or approval to adversely affect, or
cause, the appropriate governmental agency or authority to revoke such
qualification, registration or approval; (d) there are no pending or anticipated
material claims against or otherwise involving any of the Northstar Plans and no
suit, action or other litigation (excluding claims for benefits incurred in the
ordinary course of Northstar Plan activities) has been brought against or with
respect to any Northstar Plan; (e) all material contributions, reserves or
premium payments required to be made as of the date hereof to the Northstar
Plans have been made or provided for; and (f) neither Northstar nor any
Northstar Subsidiary has any material obligations for retiree health and life
benefits under any Northstar Plan.
2.14 INTELLECTUAL PROPERTY
Northstar or the Northstar Subsidiaries own or possess licenses to use all
patents, patent applications, trademarks and service marks (including
registrations and applications therefor), trade names, copyrights and written
know-how, trade secrets and all other similar proprietary data and the goodwill
associated therewith (collectively, the "Northstar Intellectual Property") that
are either material to the business of Northstar or any Northstar Subsidiary or
that are necessary for the manufacture, use, license or sale of any services or
products manufactured, used, licensed or sold by Northstar and the Northstar
Subsidiaries. The Northstar Intellectual Property is owned or licensed by
Northstar or the Northstar Subsidiaries free and clear of any Encumbrance other
than such Encumbrances that would not have a Material Adverse Effect on
Northstar. Except in the ordinary course of business, neither Northstar nor any
of the Northstar Subsidiaries has granted to any other person any license to use
any Northstar Intellectual Property. Neither Northstar nor any of the Northstar
Subsidiaries has received any notice of infringement, misappropriation or
conflict with, the intellectual property rights of others in connection with the
use by Northstar and the Northstar Subsidiaries of the Northstar Intellectual
Property.
2.15 TITLE TO PROPERTIES
Except for goods and other property sold, used or otherwise disposed of
since December 31, 1997 in the ordinary course of business for fair value,
Northstar has good and defensible title to all its properties, interests in
properties and assets, real and personal, reflected in its December 31, 1997
financial statements, free and clear of any Encumbrance, except: (a)
Encumbrances reflected in the balance sheet of Northstar as of December 31,
1997; (b) liens for current taxes not yet due and payable and (c) such
imperfections of title, easements and Encumbrances as would not have a Material
Adverse Effect on Northstar. All leases pursuant to which Northstar or any
Northstar Subsidiary leases (whether as lessee or lessor) any real or personal
property are in good standing, valid, and effective; and there is not, under any
such leases, any existing or prospective default or event of default or event
which with notice or lapse of time, or both, would constitute a default by
Northstar or any Northstar Subsidiary which, individually or in the aggregate,
would have a Material Adverse Effect on Northstar and in respect to which
Northstar or a Northstar Subsidiary has not taken adequate steps to prevent a
default from occurring. The buildings and premises of Northstar and each of the
Northstar Subsidiaries that are used in its business are in good operating
condition and repair, subject only to ordinary wear and tear. All major items of
operating equipment of Northstar and the Northstar Subsidiaries are in good
operating condition and in a state of reasonable maintenance and repair,
ordinary wear and tear
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excepted, and are free from any known defects except as may be repaired by
routine maintenance and such minor defects as do not substantially interfere
with the continued use thereof in the conduct of normal operations.
2.16 ENVIRONMENTAL MATTERS
a. There are no environmental conditions or circumstances, such as the
presence or release of any hazardous substance, on any property presently or, to
the knowledge of Northstar, previously owned or leased by Northstar or any of
the Northstar Subsidiaries that could reasonably be expected to result in a
Material Adverse Effect on Northstar;
b. Northstar and the Northstar Subsidiaries have in full force and effect
all material environmental permits, licenses, approvals and other authorizations
required to conduct their operations and are operating in material compliance
thereunder;
c. Northstar's and the Northstar Subsidiaries' operations and the use of
their assets do not violate any applicable United States or Canadian or other
federal, provincial, state or local law, statute, ordinance, rule, regulation,
order or notice requirement pertaining to (i) the condition or protection of
air, groundwater, surface water, soil, or other environmental media, (ii) the
environment, including natural resources or any activity which affects the
environment or (iii) the regulation of any pollutants, contaminants, waste or
other substances (whether or not hazardous or toxic), including the
Comprehensive Environmental Response Compensation and Liability Act (42 U.S.C.
Section 9601 et seq.), the Hazardous Materials Transportation Act (49 U.S.C.
Section 1801 et seq.), the Resource Conservation and Recovery Act (42 U.S.C.
Section 1609 et seq.) the Clean Water Act (33 U.S.C. 1251 et seq.), the Clean
Air Act (42 U.S.C. Section 7401 et seq.), the Toxic Substances Control Act (17
U.S.C. Section 2601 et seq.), the Safe Drinking Water Act (42 U.S.C. Section 201
and Section 300f et seq.), the Rivers and Harbors Act (33 U.S.C. Section 401 et
seq.), the Oil Pollution Act (33 U.S.C. Section 2701 et seq.) and analogous
Canadian, foreign, provincial, state and local provisions, as any of the
foregoing may have been amended or supplemented from time to time (collectively
the "Applicable Environmental Laws"), except for violations which, either singly
or in the aggregate, would not result in a Material Adverse Effect on Northstar;
d. To the knowledge of Northstar, none of the operations or assets of
Northstar or any Northstar Subsidiary has ever been conducted or used by
Northstar or any Northstar Subsidiary in such a manner as to constitute a
violation of any of the Applicable Environmental Laws, except for violations
which, either singly or in the aggregate, would not result in a Material Adverse
Effect on Northstar;
e. No written notice has been served on Northstar or any Northstar
Subsidiary from any entity, governmental agency or individual regarding any
existing, pending or threatened investigation or inquiry related to alleged
violations under any Applicable Environmental Laws, or regarding any claims for
remedial obligations or contribution under any Applicable Environmental Laws,
other than any of the foregoing which, either singly or in the aggregate, would
not result in a Material Adverse Effect on Northstar; and
f. Northstar does not know of any reason that would preclude it from
renewing or obtaining a reissuance of the material permits, licenses or other
authorizations required pursuant to any Applicable Environmental Laws to operate
and use any of Northstar's or the Northstar Subsidiaries' assets for their
current purposes and uses.
2.17 COMPLIANCE WITH OTHER LAWS
Neither Northstar nor any Northstar Subsidiary is in violation of or in
default with respect to, or in alleged violation of or alleged default with
respect to any other applicable law or any applicable rule or regulation, or any
writ or decree of any court or any governmental commission, board, bureau,
agency or instrumentality, or delinquent with respect to any report required to
be filed with any Governmental Entity, except for violations, defaults and
delinquencies which, either singly or in the aggregate, do not and are not
expected to result in a Material Adverse Effect on Northstar.
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2.18 TAXES
Except with respect to failures which, in the aggregate, would not result
in a Material Adverse Effect on Northstar, proper and accurate federal,
provincial, state and local income, capital, withholding, value added, sales,
use, franchise, gross revenue, turnover, excise, payroll, property, employment,
customs duties and any and all other tax returns, reports, and estimates have
been filed with appropriate governmental agencies, domestic and foreign, by
Northstar and each of the Northstar Subsidiaries for each period for which any
returns, reports, or estimates were due (taking into account any extensions of
time to file before the date hereof); all taxes shown by such returns to be
payable and any other taxes due and payable have been paid other than those
being contested in good faith by Northstar or a Northstar Subsidiary; and the
tax provision reflected in Northstar's financial statements is adequate, in
accordance with Canadian or United States (if applicable) generally accepted
accounting principles, to cover liabilities of Northstar and the Northstar
Subsidiaries for all taxes, including any interest, penalties and additions to
taxes of any character whatsoever applicable to Northstar and the Northstar
Subsidiaries or their assets or businesses. No waiver of any statute of
limitations executed by Northstar or a Northstar Subsidiary with respect to any
tax is in effect for any period. Neither Northstar nor any Northstar Subsidiary
has received any notice of reassessment from Revenue Canada or Alberta Corporate
Tax Administration that would result in a Material Adverse Effect on Northstar.
There are no tax liens on any assets of Northstar or the Northstar Subsidiaries
except for taxes not yet currently due and those which could not reasonably be
expected to result in a Material Adverse Effect on Northstar.
2.19 BROKERS AND FINDERS
Other than RBC Dominion Securities Inc. in accordance with the terms of its
engagement letter dated June 12, 1998 and Morgan Stanley Canada Limited in
accordance with the terms of its engagement letter dated March 6, 1998, none of
Northstar or any of the Northstar Subsidiaries nor any of their respective
directors, officers or employees has employed any broker or finder or incurred
any liability for any financial advisory fees, brokerage fees, commissions or
similar payments in connection with the transactions contemplated by this
Agreement. The Northstar Disclosure Letter includes a description of all of the
fees and other financial obligations and commitments of Northstar's engagement
arrangement with such firms.
2.20 DISCLOSURE
No representation or warranty made by Northstar in this Agreement or the
Northstar Disclosure Letter, nor any document, written information, statement,
financial statement, certificate or Exhibit prepared and furnished or to be
prepared and furnished by Northstar or its representatives pursuant hereto or in
connection with the transactions contemplated hereby, when taken together,
contains or contained (as of the date made) any untrue statement of a material
fact when made, or omits or omitted (as of the date made) to state a material
fact necessary to make the statements or facts contained herein or therein not
misleading, in any material way, in light of the circumstances under which they
were made.
2.21 FAIRNESS OPINION
Northstar's board of directors has received an opinion as of June 29, 1998
(and have been advised that they will receive a written opinion) from RBC
Dominion Securities Inc. that the Plan of Arrangement is fair from a financial
point of view to Northstar securityholders (the "Northstar Fairness Opinion").
2.22 RESTRICTIONS ON BUSINESS ACTIVITIES
There is no material agreement, judgment, injunction, order or court decree
binding upon Northstar or any Northstar Subsidiary that has or could reasonably
be expected to have the effect of prohibiting or materially impairing any
current business practice of Northstar or any Northstar Subsidiary, any
acquisition of property by Northstar or any Northstar Subsidiary or the conduct
of any current business by Northstar or any Northstar Subsidiary.
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2.23 YEAR 2000
Northstar has initiated a review of the implications of the Year 2000 on
its business and processes, including an evaluation of key operating and
information systems, field operations and third parties and confirms the public
disclosure provided by it in respect thereof.
ARTICLE 3
REPRESENTATIONS AND WARRANTIES OF DEVON
Except as set forth in a letter dated the date of this Agreement and
delivered by Devon to Northstar concurrently herewith (the "Devon Disclosure
Letter"), Devon hereby represents and warrants to, and agrees with, Northstar
that:
3.1 ORGANIZATION AND STANDING
Devon and each body corporate, partnership, joint venture, association or
other business entity of which more than 50% of the total voting power of shares
of stock or units of ownership or beneficial interest entitled to vote in the
election of directors (or members of a comparable governing body) is owned or
controlled, directly or indirectly, by Devon (the "Devon Subsidiaries"), is an
entity duly organized, validly existing and in good standing under the laws of
the jurisdiction of its incorporation or organization, has full requisite power
and authority to carry on its business as it is currently conducted, and to own,
lease and operate the properties currently owned, leased and operated by it, and
is duly qualified or licensed to do business and is in good standing as a
foreign corporation or organization authorized to do business in all
jurisdictions in which the character of the properties owned or leased or the
nature of the business conducted by it would make such qualification or
licensing necessary, except where the failure to be so qualified or licensed
would not have a Material Adverse Effect on Devon. The Devon Disclosure Letter
sets forth a complete list, as at the date hereof, of the Devon Subsidiaries
with assets or liabilities greater than $1 million and the percentage of each
subsidiary's outstanding capital stock or other ownership interest owned by
Devon or another Devon Subsidiary.
3.2 AGREEMENT AUTHORIZED AND ITS EFFECT ON OTHER OBLIGATIONS
a. Devon has all requisite corporate power and authority to enter into this
Agreement and to perform its obligations hereunder and, subject to approval of
Devon's stockholders as provided in this Agreement, to consummate the
Arrangement and the other transactions contemplated by this Agreement. The
execution and delivery of this Agreement by Devon and, subject to approval of
Devon's stockholders as provided in this Agreement, the consummation by Devon of
the Arrangement and the other transactions contemplated hereby have been
unanimously approved by the directors of Devon that were present at the meeting
considering the same and have been duly authorized by all other necessary
corporate action on the part of Devon. This Agreement has been duly executed and
delivered by Devon and is a valid and binding obligation of Devon, enforceable
in accordance with its terms, except that such enforceability may be subject to:
(i) bankruptcy, insolvency, reorganization or other similar laws affecting or
relating to enforcement of creditors' rights generally; and (ii) general
equitable principles, and that the consummation of the Arrangement is subject to
approval of Devon's stockholders as provided in this Agreement.
b. Neither the execution, delivery or performance of this Agreement or the
Arrangement by Devon, nor the consummation of the transactions contemplated
hereby or thereby by Devon nor compliance with the provisions hereof or thereof
by Devon will: (i) conflict with, or result in any violations of, the
Certificate of Incorporation or bylaws of Devon or any equivalent document of
any of the Devon Subsidiaries, (ii) result in any breach of or cause a default
(with or without notice or lapse of time, or both) under, (iii) give rise to a
right of termination, amendment, cancellation or acceleration of any obligation
contained in, or the loss of any material benefit under, or (iv) result in the
creation of any Encumbrance upon any of the material properties or assets of
Devon or any of the Devon Subsidiaries under, any term, condition or provision
of any loan or credit agreement, note, bond, mortgage, indenture, lease or other
agreement, judgment, order, decree, statute, law, ordinance, rule or regulation
applicable to Devon or any of the Devon Subsidiaries or their respective
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properties or assets, other than any such breaches, defaults, rights, losses, or
Encumbrances which, individually or in the aggregate, would not have a Material
Adverse Effect on Devon.
3.3 GOVERNMENTAL AND THIRD PARTY CONSENTS
a. No consent, approval, order or authorization of, or registration,
declaration or filing with, any Governmental Entity, is required to be obtained
by Devon or any of the Devon Subsidiaries in connection with the execution and
delivery of this Agreement or the Plan of Arrangement or the consummation of the
transactions contemplated hereby or thereby, except for: (i) the filing with the
Commissions and the mailing to stockholders of Devon of the Joint Proxy
Statement relating to the Devon Stockholders Meeting, (ii) the furnishing to the
SEC of the SEC Filings; (iii) approval by the Court of the Arrangement and the
filings of the articles of arrangement and other required arrangement or other
documents as required by the ABCA; (iv) such filings, authorizations, orders and
approvals as may be required under applicable federal, provincial or state
securities laws and the rules of the AMEX; (v) such filings and notifications as
may be necessary under the HSR Act; (vi) such notices and filings as may be
necessary under the Investment Canada Act and under the Competition Act
(Canada); (vii) such notice, filings, orders and approvals as may be necessary
under the Public Utilities Board Act (Alberta), Gas Utilities Act (Alberta) or
similar legislation in other applicable provinces; and (viii) where the failure
to obtain such consents, approvals, etc., would not prevent or delay the
consummation of the Arrangement or otherwise prevent Devon from performing its
obligations under this Agreement and would not reasonably be expected to have a
Material Adverse Effect on Devon.
b. Other than as contemplated by Section 3.3(a), no consents, assignments,
waivers, authorizations or other certificates are necessary in connection with
the transactions contemplated hereby to provide for the continuation in full
force and effect of all of Devon's material contracts or leases or for Devon to
consummate the transactions contemplated hereby, except when the failure to
receive such consents or other certificates would not have a Material Adverse
Effect on Devon.
3.4 CAPITALIZATION
a. The authorized capital stock of Devon consists of 400 million shares of
common stock, $0.10 par value ("Devon Common Stock", which term shall include
for all purposes of this Agreement the related Devon Common Share purchase
rights issued or issuable under that certain Shareholder Rights Plan Agreement
dated as of April 17, 1995, as amended on October 6, 1996 and December 31, 1996
(the "Devon Rights Agreement"), between Devon and The First National Bank of
Boston, as Rights Agent) and 3 million shares of preferred stock, par value
$1.00 per share, issuable in series and of which the Board of Directors of Devon
have Designated 150,000 shares as Series A Junior Participating Preferred Stock
("Devon Preferred Stock"). As of June 29, 1998, 32,319,895 shares of Devon
Common Stock were issued and outstanding and no shares of Devon Common Stock
were held by Devon in its treasury. As of June 29, 1998, 1,405,900 shares of
Devon Common Stock were reserved for issuance upon the exercise of stock options
then outstanding under Devon's stock option plans, 1,650,000 shares of Devon
Common Stock were reserved for future issuance of options under Devon's stock
option plans, 4,901,507 shares of Devon Common Stock have been reserved for
issuance upon the conversion of the Trust Convertible Preferred Securities of
Devon Financing Trust and Devon has reserved for issuance under the Devon Rights
Agreement the number of shares of Devon Common Stock and Devon Preferred Stock
required to be issued upon the exercise of the rights provided by the Devon
Rights Agreement in accordance with the terms and conditions thereof. No shares
of Devon Preferred Stock are issued or outstanding. All of the issued and
outstanding shares of Devon Common Stock have been duly authorized and validly
issued, are fully paid and nonassessable, were not issued in violation of the
terms of any agreement or other understanding binding upon Devon and were issued
in compliance with all applicable charter documents of Devon and all applicable
federal, state and foreign securities laws, rules and regulations. There are,
and have been, no preemptive rights with respect to the issuance of the shares
of Devon Common Stock or any other capital stock of Devon, other than pursuant
to the Stock Rights and Restrictions Agreement dated as of December 31, 1996
between Devon and Kerr-McGee Corporation.
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b. Other than as set forth above, there are no outstanding subscriptions,
options, warrants, convertible securities, calls, commitments, agreements or
rights (contingent or otherwise) of any character to purchase or otherwise
acquire from Devon any shares of, or any securities convertible into, the
capital stock of Devon.
3.5 SECURITIES REPORTS AND FINANCIAL STATEMENTS, BOOKS AND RECORDS
a. Devon has filed all forms, reports and documents required to be filed by
it with the SEC pursuant to relevant United States securities statutes,
regulations, policies and rules (collectively, the "Devon Securities Reports"),
all of which have complied in all material respects with all applicable
requirements of such statutes, regulations, policies and rules. None of the
Devon Securities Reports, at the time filed or as subsequently amended,
contained any untrue statement of a material fact or omitted to state a material
fact required to be stated therein or necessary in order to make the statements
made therein, in light of the circumstances under which they were made, not
misleading. The financial statements of Devon contained in the Devon Securities
Reports complied in all material respects with the then applicable accounting
requirements and the published rules and regulations of the relevant United
States securities statutes with respect thereto, were prepared in accordance
with United States generally accepted accounting principles applied on a
consistent basis during the periods involved (except as may have been indicated
in the notes thereto or, in the case of unaudited statements, as permitted by
applicable laws, rules or regulations) and fairly present (subject, in the case
of the unaudited statements, to normal, year-end audit adjustments) the
consolidated financial position of Devon and its consolidated Devon Subsidiaries
as at the respective dates thereof and the consolidated results of their
operations and cash flows for the respective periods then ended. There has been
no change in Devon's accounting policies or the methods of making accounting
estimates or changes in estimates that are material to such financial
statements, except as described in the notes thereto.
b. The books, records and accounts of Devon and the Devon Subsidiaries: (i)
have been maintained in accordance with good business practices on a basis
consistent with prior years; (ii) are stated in reasonable detail and accurately
and fairly reflect in all material respects the transactions and dispositions of
the assets of Devon and the Devon Subsidiaries; and (iii) accurately and fairly
reflect in all material respects the basis for the Devon financial statements.
Devon has devised and maintains a system of internal accounting controls
sufficient to provide reasonable assurances that: (iv) transactions are executed
in accordance with management's general or specific authorization; and (v)
transactions are recorded as necessary: (A) to permit preparation of financial
statements in conformity with United States generally accepted accounting
principles or any other criteria applicable to such statements; and (B) to
maintain accountability for assets.
3.6 LIABILITIES
Neither Devon nor any Devon Subsidiary has any material liabilities or
obligations, either accrued, absolute, contingent or otherwise, or has any
knowledge of any potential material liabilities or obligations, other than those
disclosed in the Devon Securities Reports or incurred in the ordinary course of
business since December 31, 1997.
3.7 INFORMATION SUPPLIED
None of the information supplied or to be supplied by Devon for inclusion
or incorporation by reference in the Joint Proxy Statement (and, if filed, the
Registration Statement) will, at the time the Joint Proxy Statement is mailed to
the shareholders of Devon and at the time of the Devon Stockholders Meeting
(and, if filed, at the time the Registration Statement is declared effective),
contain any untrue statement which, at the time and in light of the
circumstances under which it is made, is false or misleading with respect to any
material fact or omit to state any material fact required to be stated therein
or necessary in order to make the statements therein not false or misleading or
necessary to correct any statement in any earlier communication with respect to
the solicitation of a proxy for the same meeting or subject matter which has
become false or misleading. The Joint Proxy Statement will comply as to form in
all material respects with the provisions of the ABCA and applicable United
States and Canadian securities laws and the rules and regulations promulgated
thereunder.
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3.8 NO DEFAULTS
Neither Devon nor any Devon Subsidiary is, or has received notice that it
would be with the passage of time, in default or violation of any term,
condition or provision of (a) its charter documents or bylaws; (b) any judgment,
decree or order applicable to it; or (c) any loan or credit agreement, note,
bond, mortgage, indenture, contract, agreement, lease, license or other
instrument to which Devon or any Devon Subsidiary is now a party or by which it
or any of its properties or assets may be bound, except in the case of item (c)
for defaults and violations which, individually or in the aggregate, would not
have a Material Adverse Effect on Devon.
3.9 LITIGATION; INVESTIGATIONS
There is no claim, action, suit or proceeding pending, or to the knowledge
of Devon threatened against Devon or any of the Devon Subsidiaries, which would,
if adversely determined, individually or in the aggregate, have a Material
Adverse Effect on Devon, nor is there any judgment, decree, injunction, rule or
order of any Governmental Entity or arbitrator outstanding against Devon or any
of the Devon Subsidiaries having, or which, insofar as reasonably can be
foreseen, in the future could have, any such effect. There is no investigation
pending, or to the knowledge of Devon threatened, against Devon or any of the
Devon Subsidiaries before any Governmental Entity which could have such effect.
3.10 ABSENCE OF CERTAIN CHANGES AND EVENTS
Other than as a result of the transactions contemplated by this Agreement,
since December 31, 1997, there has not been:
a. Any material adverse change in the financial condition, operations,
assets, liabilities or business of Devon and the Devon Subsidiaries, taken
as a whole;
b. Any material damage, destruction, or loss to the business or
properties of Devon and the Devon Subsidiaries, taken as a whole, not
covered by insurance;
c. Any declaration, setting aside or payment of any dividend or other
distribution in respect of the capital stock of Devon, or any direct or
indirect redemption, purchase or any other acquisition by Devon of any such
stock, provided that Devon may continue to pay quarterly dividends upon the
shares of Devon Common Stock and preferred shares not greater than those
paid in the first quarter of 1998;
d. Any change in the capital stock or in the number of shares or
classes of Devon's authorized or outstanding capital stock as described in
Section 3.4 (other than as a result of exercises of options to purchase
Devon Common Stock outstanding or issued as permitted hereunder,
conversions of Trust Convertible Preferred Securities or exercise of rights
under the Devon Rights Agreement);
e. Any material labor dispute or charge of unfair labor practice
(other than routine individual grievances) or, to the knowledge of Devon,
any activity or proceeding by a labor union or by a representative thereof
to organize any employees of Devon or any Devon Subsidiary or any campaign
being conducted to solicit authorization from employees to be represented
by such labor union; or
f. Any other event or condition known to Devon particularly pertaining
to and adversely affecting the operations, assets or business of Devon or
any of the Devon Subsidiaries (other than events or conditions which are of
a general or industry-wide nature and of general public knowledge) which
would constitute a Material Adverse Effect on Devon.
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3.11 ADDITIONAL DEVON INFORMATION
The Devon Disclosure Letter contains true, complete and correct lists of
the following items with respect to Devon and each of the Devon Subsidiaries,
and Devon has furnished or made available to Northstar true, complete and
correct copies of all documents referred to in such lists:
a. All contracts which involve, or may involve, aggregate payments by
any party thereto of $5 million or more, which payments or obligations are
to be performed in whole or in part after the Effective Time and which are
not cancellable or terminable by Devon without payment or penalty in excess
of $500,000;
b. All material option, bonus, incentive compensation, deferred
compensation, employment agreements, profit-sharing, retirement, pension,
welfare, group insurance, death benefit, or other fringe benefit plans,
arrangements or trust agreements;
c. All material patents, trademarks, copyrights and other intellectual
property rights owned, licensed or used and all applications therefor;
d. All material trade names and fictitious names used or held, whether
and where such names are registered and where used;
e. All material long-term and short-term promissory notes, installment
contracts, loan agreements, credit agreements, operating and finance
leases, and any other material agreements relating thereto or with respect
to collateral securing the same; and
f. All material indebtedness, liabilities and commitments of third
parties (other than Devon Subsidiaries) and as to which it is a guarantor,
endorser, co-maker, surety or accommodation maker, or is contingently
liable therefor (excluding liabilities as an endorser of checks and the
like in the ordinary course of business) or has otherwise provided any form
of financial assistance and all letters of credit in excess of $100,000,
whether stand-by or documentary, issued by any third party.
3.12 CERTAIN AGREEMENTS
Except for the Devon employment agreements disclosed under Section 3.11(b)
and the acceleration of vesting of Devon Options under the 1997 Stock Option
Plan, neither the execution and delivery of this Agreement nor the consummation
of the transactions contemplated hereby will: (a) result in any payment
(including severance, unemployment compensation, parachute payment, bonus or
otherwise) becoming due to any director, employee or independent contractor of
Devon or any of the Devon Subsidiaries (as defined in Section 3.13) under any
Devon Plan (as defined in Section 3.13) or otherwise; (b) materially increase
any benefits otherwise payable under any Devon Plan or otherwise; or (c) result
in the acceleration of the time of payment or vesting of any such benefits.
3.13 EMPLOYEE BENEFIT PLANS
For purposes of Section 3.12 and this Section 3.13, Devon Subsidiaries
shall include any enterprise which, with Devon, forms or formed a controlled
group of corporations, a group of trades or business under common control or an
affiliated service group, within the meaning of Section 414(b), (c) or (m) of
the Internal Revenue Code of 1986, as amended (the "Code"). All employee
benefits plans covering active, former or retired employees of Devon and the
Devon Subsidiaries are listed in the Devon Disclosure Letter (the "Devon
Plans"). Devon has made available to Northstar true, complete and correct copies
of each Devon Plan, any related trust agreement, annuity or insurance contract
or other funding vehicle, and: (a) each Devon Plan has been maintained and
administered in material compliance with its terms and is, to the extent
required by applicable law or contract, fully funded without having any deficit
or unfunded actuarial liability or adequate provision has been made therefor;
(b) all required employer contributions under any such plans have been made and
the applicable funds have been funded in accordance with the terms thereof, (c)
each Devon Plan that is required or intended to be qualified under applicable
law or registered or approved by a governmental agency or authority has been so
qualified, registered or approved by the appropriate governmen-
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tal agency or authority, and nothing has occurred since the date of the last
qualification, registration or approval to adversely affect, or cause, the
appropriate governmental agency or authority to revoke such qualification,
registration or approval; (d) to the extent applicable, the Devon Plans comply,
in all material respects, with the requirements of the Employee Retirement
Income Security Act of 1974, as amended ("ERISA"), the Code and any other
applicable tax act and other laws, and any Devon Plan intended to be qualified
under Section 401(a) of the Code has been determined by the Internal Revenue
Service to be so qualified and nothing has occurred to cause the loss of such
qualified status; (e) except for the Retirement Plan for Non-Bargaining
Employees of Devon Energy Corporation and the Retirement Plan for Former
Employees of Devon, no Devon Plan is covered by Title IV of ERISA or Section 412
of the Code; (f) there are no pending or anticipated material claims against or
otherwise involving any of the Devon Plans and no suit, action or other
litigation (excluding claims for benefits incurred in the ordinary course of
Devon Plan activities) has been brought against or with respect to any Devon
Plan; (g) all material contributions, reserves or premium payments, required to
be made as of the date hereof to the Devon Plans have been made or provided for;
(h) neither Devon nor any Devon Subsidiary has incurred or reasonably expects to
incur any liability under subtitle C or D of Title IV of ERISA with respect to
any "single-employer plan," within the meaning of Section 4001(a)(15) of ERISA,
currently or formerly maintained by Devon, any Devon Subsidiary or any entity
which is considered one employer with Devon under Section 4001 of ERISA; (i)
neither Devon nor any Devon Subsidiary has incurred or reasonably expects to
incur any withdrawal liability under Subtitle E of Title TV of ERISA with
respect to any "multi-employer plan," within the meaning of Section 4001(a)(3)
of ERISA; and (j) neither Devon nor any Devon Subsidiary has any material
obligations for retiree health and life benefits under any Devon Plan.
3.14 INTELLECTUAL PROPERTY
Devon or the Devon Subsidiaries own or possess licenses to use all patents,
patent applications, trademarks and service marks (including registrations and
applications therefor), trade names, copyrights and written know-how, trade
secrets and all other similar proprietary data and the goodwill associated
therewith (collectively, the "Devon Intellectual Property") that are either
material to the business of Devon or any Devon Subsidiary or that are necessary
for the manufacture, use, license or sale of any services or products
manufactured, used, licensed or sold by Devon and the Devon Subsidiaries. The
Devon Intellectual Property is owned or licensed by Devon or the Devon
Subsidiaries free and clear of any Encumbrance other than such Encumbrances that
would not have a Material Adverse Effect on Devon. Except in the ordinary course
of business, neither Devon nor any of the Devon Subsidiaries has granted to any
other person any license to use any Devon Intellectual Property. Neither Devon
nor any of the Devon Subsidiaries has received any notice of infringement,
misappropriation or conflict with, the intellectual property rights of others in
connection with the use by Devon and the Devon Subsidiaries of the Devon
Intellectual Property.
3.15 TITLE TO PROPERTIES
Except for goods and other property sold, used or otherwise disposed of
since December 31, 1997 in the ordinary course of business for fair value, Devon
has good and defensible title to all its properties, interests in properties and
assets, real and personal, reflected in its December 31, 1997 financial
statements, free and clear of any Encumbrance, except: (a) Encumbrances
reflected in the balance sheet of Devon as of December 31, 1997; (b) liens for
current taxes not yet due and payable; and (c) such imperfections of title,
easements and Encumbrances as would not have a Material Adverse Effect on Devon.
All leases pursuant to which Devon or any Devon Subsidiary leases (whether as
lessee or lessor) any real or personal property are in good standing, valid, and
effective; and there is not, under any such leases, any existing or prospective
default or event of default or event which with notice or lapse of time, or
both, would constitute a default by Devon or any Devon Subsidiary which
individually or in the aggregate would have a Material Adverse Effect on Devon
and in respect to which Devon or a Devon Subsidiary has not taken adequate steps
to prevent a default from occurring. The buildings and premises of Devon and
each of the Devon Subsidiaries that are used in its business are in good
operating condition and repair, subject only to ordinary wear and tear. All
major items of operating equipment of Devon and the Devon Subsidiaries are in
good operating condition and in a state of reasonable maintenance and repair,
ordinary wear and tear excepted, and are free from any known defects
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except as may be repaired by routine maintenance and such minor defects as do
not substantially interfere with the continued use thereof in the conduct of
normal operations.
3.16 ENVIRONMENTAL MATTERS
a. There are no environmental conditions or circumstances, such as the
presence or release of any hazardous substance, on any property presently or, to
the knowledge of Devon, previously owned or leased by Devon or any of the Devon
Subsidiaries that could reasonably be expected to result in a Material Adverse
Effect on Devon;
b. Devon and the Devon Subsidiaries have in full force and effect all
material environmental permits, licenses, approvals and other authorizations
required to conduct their operations and are operating in material compliance
thereunder;
c. Devon's and the Devon Subsidiaries' operations and the use of their
assets do not violate any applicable United States or Canadian or other federal,
provincial, state or local law, statute, ordinance, rule, regulation, order or
notice requirement pertaining to (i) the condition or protection of air,
groundwater, surface water, soil, or other environmental media, (ii) the
environment, including natural resources or any activity which affects the
environment or (iii) the regulation of any pollutants, contaminants, waste or
other substances (whether or not hazardous or toxic), including the Applicable
Environmental Laws, except for violations which, either singly or in the
aggregate, would not result in a Material Adverse Effect on Devon;
d. To the knowledge of Devon, none of the operations or assets of Devon or
any Devon Subsidiary has ever been conducted or used by Devon or any Devon
Subsidiary in such a manner as to constitute a violation of any of the
Applicable Environmental Laws, except for violations which, either singly or in
the aggregate, would not result in a Material Adverse Effect on Devon;
e. No written notice has been served on Devon or any Devon Subsidiary from
any entity, governmental agency or individual regarding any existing, pending or
threatened investigation or inquiry related to alleged violations under any
Applicable Environmental Laws, or regarding any claims for remedial obligations
or contribution under any Applicable Environmental Laws, other than any of the
foregoing which, either singly or in the aggregate, would not result in a
Material Adverse Effect on Devon; and
f. Devon does not know of any reason that would preclude it from renewing
or obtaining a reissuance of the material permits, licenses, or other
authorizations required pursuant to any Applicable Environmental Laws to operate
and use any of Devon's or the Devon Subsidiaries' assets for their current
purposes and uses.
3.17 COMPLIANCE WITH OTHER LAWS
Neither Devon nor any Devon Subsidiary is in violation of or in default
with respect to, or in alleged violation of or alleged default with respect to
any other applicable law or any applicable rule or regulation, or any writ or
decree of any court or any governmental commission, board, bureau, agency or
instrumentality, or delinquent with respect to any report required to be filed
with any Governmental Entity, except for violations, defaults and delinquencies
which, either singly or in the aggregate, do not and are not expected to result
in a Material Adverse Effect on Devon.
3.18 TAXES
Except with respect to failures which, in the aggregate, would not result
in a Material Adverse Effect on Devon, proper and accurate federal, provincial,
state and local income, capital, withholding, value added, sales, use,
franchise, gross revenue, turnover, excise, payroll, property, employment,
customs duties and any and all other tax returns, reports, and estimates have
been filed with appropriate governmental agencies, domestic and foreign, by
Devon and each of the Devon Subsidiaries for each period for which any returns,
reports, or estimates were due (taking into account any extensions of time to
file before the date hereof); all taxes shown by such returns to be payable and
any other taxes due and payable have been paid other than those being contested
in good faith by Devon or a Devon Subsidiary; and the tax provision reflected in
Devon's financial statements is adequate, in accordance with United States or
Canadian (if applicable) generally accepted
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accounting principles, to cover liabilities of Devon and the Devon Subsidiaries
for all taxes, including any interest, penalties and additions to taxes of any
character whatsoever applicable to Devon and the Devon Subsidiaries or their
assets or businesses. No waiver of any statute of limitations executed by Devon
or a Devon Subsidiary with respect to any tax is in effect for any period.
Neither Devon nor any Devon Subsidiary has received any notice of reassessment
from Revenue Canada or Alberta Corporate Tax Administration that would result in
a Material Adverse Effect on Devon. There are no tax liens on any assets of
Devon or the Devon Subsidiaries except for taxes not yet currently due and those
which could not reasonably be expected to result in a Material Adverse Effect on
Devon.
3.19 BROKERS AND FINDERS
Other than Merrill, Lynch, Pierce, Fenner & Smith Incorporated in
accordance with the terms of its engagement letter dated June 24, 1998, a copy
of which has previously been provided to Northstar, none of Devon or any of the
Devon Subsidiaries nor any of their respective directors, officers or employees
has employed any broker or finder or incurred any liability for any financial
advisory fees, brokerage fees, commissions or similar payments in connection
with the transactions contemplated by this Agreement.
3.20 DISCLOSURE
No representation or warranty made by Devon in this Agreement or the Devon
Disclosure Letter, nor any document, written information, statement, financial
statement, certificate or Exhibit prepared and furnished or to be prepared and
furnished by Devon or its representatives pursuant hereto or in connection with
the transactions contemplated hereby, when taken together, contains or contained
(as of the date made) any untrue statement of a material fact when made, or
omits or omitted (as of the date made) to state a material fact necessary to
make the statements or facts contained herein or therein not misleading, in any
material way, in light of the circumstances under which they were made.
3.21 FAIRNESS OPINION
Devon's board of directors has received an opinion, as of June 29, 1998
(and have been advised that they will receive a written opinion) from Merrill,
Lynch, Pierce, Fenner & Smith Incorporated that the Exchange Ratio is fair from
a financial point of view to Devon (the "Devon Fairness Opinion").
3.22 RESTRICTIONS ON BUSINESS ACTIVITIES
There is no material agreement, judgment, injunction, order or court decree
binding upon Devon or any Devon Subsidiary that has or could reasonably be
expected to have the effect of prohibiting or materially impairing any current
business practice of Devon or any Devon Subsidiary, any acquisition of property
by Devon or any Devon Subsidiary or the conduct of any current business by Devon
or any Devon Subsidiary.
3.23 YEAR 2000
Devon has initiated a review of the implications of the Year 2000 on its
business and processes, including an evaluation of key operating and information
systems, field operations and third parties and confirms the public disclosure
provided by it in respect thereof.
3.24 DEVON RIGHTS AGREEMENT
The consummation of the Arrangement and the other transactions contemplated
by this Agreement will not cause the Rights issued under the Devon Rights
Agreement to become exercisable unless as a result thereof any Person becomes an
Acquiring Person. The terms Rights, Acquiring Person and Person have the
meanings ascribed thereto in the Devon Rights Agreement.
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ARTICLE 4
OBLIGATIONS PENDING EFFECTIVE DATE
4.1 AGREEMENTS OF DEVON AND NORTHSTAR
Devon and Northstar agree to take the following actions after the date
hereof:
a. Each party will promptly execute and file or join in the execution
and filing of any application or other document that may be necessary in
order to obtain the authorization, approval or consent of any Governmental
Entity which may be reasonably required, or which the other party may
reasonably request, in connection with the consummation of the transactions
contemplated by this Agreement. Each party will use its reasonable best
efforts to promptly obtain such authorizations, approvals and consents.
Without limiting the generality of the foregoing, as promptly as
practicable after the execution of this Agreement, each party shall make
any required filings under the HSR Act and shall make such filings as are
necessary under the Investment Canada Act and the Competition Act (Canada);
b. Each party will allow the other and its agents reasonable access to
the files, books, records, offices and officers of itself and its
subsidiaries, including any and all information relating to such party's
tax matters, contracts, leases, licenses and real, personal and intangible
property and financial condition. Each party will cause its accountants to
cooperate with the other in making available to the other party all
financial information reasonably requested, including the right to examine
all working papers pertaining to tax matters and financial statements
prepared or audited by such accountants. Notwithstanding the foregoing,
except as expressly provided for herein, neither party shall be obligated
to make available to the other any of their respective board of directors'
materials relating to the assessment or evaluation of the transactions
contemplated hereby or any alternative transactions nor any information
supplied by any of their respective officers, directors, employees,
financial advisors, legal advisors, representatives and agents in
connection therewith.
c. Devon and Northstar shall cooperate in the preparation and prompt
filing by Devon of the Joint Proxy Statement and the Registration Statement
with the SEC;
d. Each of Devon and Northstar will promptly notify the other in
writing (i) of any event occurring subsequent to the date of this Agreement
which would render any representation and warranty of such party contained
in this Agreement untrue or inaccurate in any material respect; (ii) of any
event, change or effect that is materially adverse to the financial
condition, properties or business of such party and its subsidiaries, taken
as a whole; and (iii) of any breach by such party of any material covenant
or agreement contained in this Agreement;
e. During the term of this Agreement, each of Devon and Northstar will
use its reasonable best efforts to satisfy or cause to be satisfied as soon
as reasonably practicable all the conditions precedent that are set forth
in Article 5 hereof, and each of Devon and Northstar will use its
reasonable best efforts to cause the Arrangement and the other transactions
contemplated by this Agreement to be consummated as soon as reasonably
practicable; and
f. Each of Devon and Northstar covenants and agrees that it will use
all reasonable efforts (including, without limitation, investigations and
consultations with its professional advisors) such that it and its
affiliates will not take or agree to take any action that would prevent
Devon from accounting for the business combination to be effected by the
Arrangement as a pooling of interests in accordance with the United States
generally accepted accounting principles and applicable rules and
regulations of the SEC and each of Northstar and Devon agrees to consult
with the other and with their respective independent accountants concerning
any potential transaction or other matter or action that might have such
effect forthwith upon such potential transaction, matters or actions having
been identified (after having made all reasonable efforts to make such
identification).
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4.2 ADDITIONAL AGREEMENTS OF NORTHSTAR
Northstar agrees that, except as expressly contemplated by this Agreement
or as otherwise agreed to in writing by Devon or as set forth in the Northstar
Disclosure Letter, from the date hereof to the Effective Date it will, and will
cause each of the Northstar Subsidiaries to:
a. Other than as contemplated by this Agreement, operate its business
only in the usual, regular and ordinary manner and, to the extent
consistent with such operation, use all commercially reasonable efforts to
preserve intact its present business organization, keep available the
services of its present officers and employees, and preserve its
relationships with customers, suppliers, distributors and others having
business dealings with it;
b. Maintain all of its property and assets in customary repair, order,
and condition, reasonable wear and use and damage by fire or unavoidable
casualty excepted;
c. Maintain its books of account and records in the usual, regular and
ordinary manner, in accordance with generally accepted accounting
principles applied on a consistent basis;
d. Duly comply in all material respects with all laws applicable to it
and to the conduct of its business;
e. Not: (i) enter into any contracts of employment which: (A) cannot
be terminated on notice of 60 days or less; or (B) provide for any
severance payments or benefits covering a period beyond the termination
date of such employment contract, except as may be required by law; or (ii)
amend any employee benefit plan or stock option plan, except as may be
required for compliance with this Agreement or applicable law;
f. Not incur any borrowings except: (i) the refinancing of
indebtedness now outstanding or additional borrowings under its existing
revolving credit facilities; (ii) the prepayment by customers of amounts
due or to become due for goods sold or services rendered or to be rendered
in the future; (iii) trade payables incurred in the ordinary course of
business; or (iv) other borrowings incurred in the ordinary course of
business to finance normal operations;
g. Not enter into commitments of a capital expenditure nature or incur
any contingent liability which would exceed $5,000,000 individually and
$20,000,000 in the aggregate, except: (i) as may be necessary for the
maintenance of existing facilities, machinery and equipment in good
operating condition and repair in the ordinary course of business; (ii) as
may be required by law; or (iii) as may be allocated in the capital budget
of Northstar, a copy of which has been provided to Devon;
h. Not sell, dispose of, or encumber, any property or assets, except:
(i) in the ordinary course of business; or (ii) as may be reasonably
required in connection with borrowings under Section 4.2(f);
i. Maintain insurance upon all its properties and with respect to the
conduct of its business of such kinds and in such amounts as is customary
in the type of business in which it is engaged, but not less than that
presently carried by it;
j. Not amend its charter documents or bylaws or other organizational
documents or merge or consolidate with or into any other corporation or
change in any manner the rights of its capital stock or the character of
its business, except for the winding-up of Morrison Petroleums Ltd.;
k. Other than the grant of options to purchase up to 413,350 Northstar
Common Shares pursuant to the commitment of Northstar made in January,
1998, not issue or sell (except upon the exercise of outstanding options),
or issue options or rights to subscribe to, or enter into any contract or
commitment to issue or sell, any shares of its capital stock or subdivide
or in any way reclassify any shares of its capital stock, or acquire, or
agree to acquire, any shares of its capital stock;
l. Not declare or pay any dividend on shares of its capital stock or
make any other distribution of assets to the holders thereof;
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m. Deliver to Devon, within 30 days after the end of each fiscal
quarter of Northstar beginning June 30, 1998, and through the Effective
Date, unaudited consolidated balance sheets and related unaudited
statements of income and cash flows as of the end of each fiscal quarter of
Northstar, and as of the corresponding fiscal quarter of the previous
fiscal year. Northstar hereby represents and warrants that such unaudited
consolidated financial statements shall (i) be complete in all material
respects except for the omission of notes and schedules contained in
audited financial statements, (ii) present fairly in all material respects
the financial condition of Northstar as at the dates indicated and the
results of operations for the respective periods indicated, (iii) shall
have been prepared in accordance with Canadian generally accepted
accounting principles applied on a consistent basis, except as noted
therein and (iv) shall contain all adjustments which Northstar considers
necessary for a fair presentation of its results for each respective fiscal
period;
n. Cause Deloitte & Touche LLP to deliver to Northstar (which
Northstar shall provide to Devon) a letter with respect to whether
Northstar is a poolable entity under the United States generally accepted
accounting principles and applicable rules and regulations of the SEC as at
the Effective Date; and
o. Northstar shall immediately cease and terminate any existing
solicitation, initiation, encouragement, activity, discussion or
negotiation with any parties conducted heretofore by Northstar, any
Northstar Subsidiary or their officers, directors, employees, financial
advisors, representatives and agents ("Representatives") with respect to an
Acquisition Proposal (as defined herein). Without the prior written consent
of Devon, from and after the date hereof, Northstar and the Northstar
Subsidiaries will not, and will not authorize or permit any of their
Representatives to, directly or indirectly, solicit, initiate or encourage
(including by way of furnishing information) or take any other action to
facilitate any inquiries or the making of any proposal which constitutes or
may reasonably be expected to lead to an Acquisition Proposal from any
person, or engage in any discussion or negotiations relating thereto or
accept any Acquisition Proposal; provided, however, that notwithstanding
any other provision hereof, Northstar may at any time prior to the time
Northstar's shareholders shall have voted to approve the Plan of
Arrangement and the other transactions contemplated thereby (i) engage in
discussions or negotiations with a third party who (without any
solicitation, initiation or encouragement, directly or indirectly, by
Northstar, any Northstar Subsidiary or the Representatives after the date
hereof) seeks to initiate such discussions or negotiations and may furnish
such third party information concerning Northstar and its business,
properties and assets if, and only to the extent that, (A) the third party
has first made an Acquisition Proposal that is financially superior to the
transactions contemplated by this Agreement and has demonstrated that the
funds or other consideration necessary for the Acquisition Proposal are
reasonably likely to be available (as determined in good faith in each case
by Northstar's board of directors after receiving the written advice of its
financial advisors) (a "Superior Proposal") and Northstar's board of
directors has concluded in good faith, after considering applicable law and
receiving the written advice of outside counsel that such action is
necessary for the board of directors to act in a manner consistent with its
fiduciary duties under applicable law, (B) prior to furnishing such
information to or entering into discussions or negotiations with such
person or entity, Northstar provides prompt notice to Devon to the effect
that it is furnishing information to or entering into discussions or
negotiations with a person or entity in respect to a Superior Proposal and
receives from such person or entity an executed confidentiality agreement
in reasonably customary form, (C) Northstar provides prompt notice to Devon
at such time as it is terminating any such discussions or negotiations with
such person or entity, and (D) Northstar provides to Devon any information
provided to any such person or entity not previously made available to
Devon, (ii) comply with Rules 14d-9 and 14e-2 promulgated under the
Exchange Act with regard to a tender or exchange offer, if applicable, and
similar rules under applicable Canadian securities laws relating to the
provision of directors' circulars, and make appropriate disclosure with
respect thereto to Northstar's shareholders and (iii) accept, recommend,
approve or implement a Superior Proposal from a third party, but only (in
the case of this clause (iii)) if prior to such acceptance, recommendation,
approval or implementation, Northstar's board of directors shall have
concluded in good faith, after considering provisions of applicable law and
after giving effect to all proposals to adjust the terms and conditions of
this Agreement and the Arrangement which may be offered by Devon during the
five day notice period set forth below and after receiving the written
advice of
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outside counsel, that such action is necessary for Northstar's board o f
directors to act in a manner consistent with its fiduciary duties under
applicable law and Northstar terminates this Agreement in accordance with
Sections 6.1(i) and 6.4. Northstar shall give Devon orally and in writing
at least five days advance notice of any decision by the Board of Northstar
to accept, recommend, approve or implement a Superior Proposal which notice
shall identify the party making the Superior Proposal and shall provide
full details of all material terms and conditions thereof. In addition
Northstar shall, and shall cause its respective financial and legal
advisors to, negotiate in good faith with Devon to make such adjustments in
the terms and conditions of this Agreement and of the Arrangement as would
enable Northstar to proceed with the transactions contemplated hereby. In
the event this Agreement and the Arrangement are amended as provided above
(including without limitation if Devon and Northstar agree to mutually
acceptable adjustments as provided above), then Northstar shall not enter
into any agreement regarding the Superior Proposal; As used herein,
"Acquisition Proposal" shall mean a proposal or offer (other than by
Devon), whether or not subject to a due diligence condition, to acquire
beneficial ownership (as defined under Rule 13(d) of the Exchange Act) of
all or a material portion of the assets of, or any material equity interest
in, Northstar or any material Northstar Subsidiary pursuant to a merger,
consolidation or other business combination, by means of a sale of shares
of capital stock, sale of assets, tender offer or exchange offer or similar
transaction involving Northstar or any material Northstar Subsidiary
including without limitation any single or multi-step transaction or series
of related transactions which is structured to permit such third party to
acquire beneficial ownership or any material portion of the assets of, or
any material portion of the equity interest in, Northstar or any material
Northstar Subsidiary (other than the transactions contemplated by this
Agreement), provided however, in no event shall an underwritten public or
private sale of Northstar Common Shares (aggregating less than 50% of the
currently issued and outstanding Northstar Common Shares), which is not
made in connection with a merger, consolidation or other business
combination, be deemed to be an Acquisition Proposal.
4.3 ADDITIONAL AGREEMENTS OF DEVON
Devon agrees that, except as expressly contemplated by this Agreement or
otherwise agreed to in writing by Northstar or as set forth in the Devon
Disclosure Letter, from the date hereof to the Effective Date it will, and will
cause each of the Devon Subsidiaries to:
a. Other than as contemplated by this Agreement, operate its business
only in the usual, regular, and ordinary manner and, to the extent
consistent with such operation, use all commercially reasonable efforts to
preserve intact its present business organization, keep available the
services of its present officers and employees, and preserve its
relationships with customers, suppliers, distributors, and others having
business dealings with it;
b. Maintain all of its property and assets in customary repair, order,
and condition, reasonable wear and use and damage by fire or unavoidable
casualty excepted;
c. Maintain its books of account and records in the usual, regular,
and ordinary manner, in accordance with generally accepted accounting
principles applied on a consistent basis;
d. Duly comply in all material respects with all laws applicable to it
and to the conduct of its business;
e. Not: (i) enter into any contracts of employment which: (A) cannot
be terminated on notice of 60 days or less; or (B) provide for any
severance payments or benefits covering a period beyond the termination
date of such employment contract, except as may be required by law; or (ii)
amend any employee benefit plan or stock option plan, except as may be
required for compliance with this Agreement or applicable law;
f. Not incur any borrowings except: (i) the refinancing of
indebtedness now outstanding or additional borrowings under its existing
revolving credit facilities; (ii) the prepayment by customers of amounts
due or to become due for goods sold or services rendered or to be rendered
in the future;
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(iii) trade payables incurred in the ordinary course of business; or (iv)
other borrowings incurred in the ordinary course of business to finance
normal operations;
g. Not enter into commitments of a capital expenditure nature or incur
any contingent liability which would exceed $5,000,000 individually and
$20,000,000 in the aggregate, except: (i) as may be necessary for the
maintenance of existing facilities, machinery and equipment in good
operating condition and repair in the ordinary course of business; (ii) as
may be required by law; or (iii) as may be allocated in the capital budget
of Devon, a copy of which has been provided to Northstar;
h. Not sell, dispose of, or encumber, any property or assets, except:
(i) in the ordinary course of business; or (ii) as may be reasonably
required in connection with borrowings under Section 4.3(f);
i. Maintain insurance upon all its properties and with respect to the
conduct of its business of such kinds and in such amounts as is customary
in the type of business in which it is engaged, but not less than that
presently carried by it;
j. Not amend its charter documents or bylaws or other organizational
documents or merge or consolidate with or into any other corporation or
change in any manner the rights of its capital stock or the character of
its business;
k. Not issue or sell (except upon the exercise of outstanding options
or warrants), or issue options or rights to subscribe to, or enter into any
contract or commitment to issue or sell, any shares of its capital stock or
subdivide or in any way reclassify any shares of its capital stock, or
acquire, or agree to acquire, any shares of its capital stock;
l. Not declare or pay any dividend on shares of its capital stock or
make any other distribution of assets to the holders thereof, other than
quarterly dividends upon the shares of Devon Common Stock and preferred
shares not greater than those paid in the first quarter of 1998;
m. Deliver to Northstar, within 30 days after the end of each fiscal
quarter of Devon beginning June 30, 1998, and through the Effective Date,
unaudited consolidated balance sheets and related unaudited statements of
income and cash flows as of the end of each fiscal quarter of Devon, and as
of the corresponding fiscal quarter of the previous fiscal year. Devon
hereby represents and warrants that such unaudited consolidated financial
statements shall: (i) be complete in all material respects except for the
omission of notes and schedules contained in audited financial statements;
(ii) present fairly in all material respects the financial condition of
Devon as at the dates indicated and the results of operations for the
respective periods indicated; (iii) shall have been prepared in accordance
with United States generally accepted accounting principles applied on a
consistent basis, except as noted therein; and (iv) shall contain all
adjustments which Devon considers necessary for a fair presentation of its
results for each respective fiscal period; and
n. Use its reasonable best efforts to cause: (i) the shares of Devon
Common Stock to be issued from time to time after the Effective Time upon
exchange of the Exchangeable Shares to be listed upon the Closing on the
AMEX; and (ii) with the cooperation and assistance of Northstar, the
Exchangeable Shares to be listed on the TSE or, in the event that a listing
on the TSE is not available, on another recognized Canadian stock exchange.
4.4 PUBLIC ANNOUNCEMENTS
Neither Devon nor Northstar, nor any of their respective affiliates, shall
issue or cause the publication of any press release or other public announcement
with respect to this Agreement, the Arrangement or the other transactions
contemplated hereby without the prior consent of the other party, except as may
be required by law or by any listing agreement with a national securities
exchange.
4.5 COMFORT LETTERS
a. Upon request of Devon, Northstar shall use its reasonable best efforts
to cause to be delivered to Devon a letter (the "Northstar Comfort Letter") of
Deloitte & Touche LLP and/or Deloitte & Touche,
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Chartered Accountants, addressed to Devon and dated as of a date within five
days before the earlier of: (i) the date the Joint Proxy Statement is first
mailed to each company's respective securityholders; and (ii) if a Registration
Statement is required, the date on which the Registration Statement shall become
effective, in form and substance reasonably satisfactory to Devon and customary
in scope and substance for "comfort" letters delivered by independent public
accountants in connection with proxy statements and registration statements
similar to the Joint Proxy Statement and the Registration Statement.
b. Upon request of Northstar, Devon shall use its reasonable best efforts
to cause to be delivered to Northstar a letter (the "Devon Comfort Letter") of
KPMG Peat Marwick LLP and/or KPMG, Chartered Accountants, addressed to Northstar
and dated as of a date within five days before the earlier of: (i) the date the
Joint Proxy Statement is first mailed to each company's respective
securityholders; and (ii) if a Registration Statement is required, the date on
which the Registration Statement shall become effective, in form and substance
reasonably satisfactory to Northstar and customary in scope and substance for
"comfort" letters delivered by independent public accountants in connection with
proxy statements and registration statements similar to the Joint Proxy
Statement and the Registration Statement.
4.6 BOARD OF DIRECTORS
The board of directors of Devon will take action prior to the Effective
Time to cause the number of directors comprising the full board of directors of
Devon to be increased by not less than 2 persons and the resulting vacancies to
be filled by persons designated by the Northstar board of directors (which
designations shall be subject to the approval of a majority of Devon's directors
at that time) shall be elected to the board of directors of Devon by the Devon
board of directors effective at the Effective Time, such increase in number and
such election to be subject to the consummation of the Closing. If prior to the
Effective Time any Northstar designee for director shall decline or be unable to
serve as a director of Devon, Northstar's board of directors shall designate
another person to serve in such person's stead, subject to the approval of a
majority of Devon's directors at that time.
ARTICLE 5
CONDITIONS PRECEDENT TO OBLIGATIONS
5.1 CONDITIONS PRECEDENT TO OBLIGATIONS OF EACH PARTY
The obligations of each party to consummate and effect the transactions
contemplated hereunder shall be subject to the satisfaction or waiver on or
before the Effective Date of the following conditions:
a. Securityholder Approval. The Arrangement and the other transactions
contemplated hereby shall have been approved and adopted by the Northstar
securityholders in accordance with applicable law and Northstar's articles
of amalgamation and bylaws, and Northstar shall not have received on or
prior to the Effective Time notice from the holders of more than 10% of the
issued and outstanding Northstar Common Shares and Northstar Options, in
aggregate, of their intention to exercise their rights of dissent under
section 184 of the ABCA. In addition, the matters referred to in Section
7.1 shall have been approved by the holders of shares of the Devon Common
Stock in accordance with the rules of AMEX, applicable law and Devon's
Certificate of Incorporation and bylaws;
b. No Legal Action. No order shall have been entered and remain in
effect in any action or proceeding before any Governmental Entity that
would prevent or make illegal the consummation of the Arrangement;
c. Court Approval. The Court shall have issued its final order
approving the Arrangement in form and substance reasonably satisfactory to
Devon and Northstar and reflecting the terms hereof;
d. Commissions, etc. All necessary orders shall have been obtained
from the Commissions and other relevant United States and Canadian
securities regulatory authorities in connection with the Arrangement. All
waiting periods required by HSR shall have expired with respect to the
transactions
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contemplated by this Agreement, or early termination with respect thereto
shall have been obtained, without the imposition of any governmental
request or order requiring the sale or disposition or holding separate
(through a trust or otherwise) of a material portion of the assets or
businesses of Northstar or Devon. Devon and Northstar shall each have filed
all notices and information (if any) required under Part IX of the
Competition Act (Canada) and the applicable waiting periods and any
extensions thereof shall have expired or the parties shall have received an
Advance Ruling Certificate pursuant to Section 102 of the Competition Act
(Canada) setting out that the Director under such Act is satisfied he would
not have sufficient grounds on which to apply for an order in respect of
the Arrangement. The Arrangement shall have received the allowance or
approval or deemed allowance or approval by the responsible Minister under
the Investment Canada Act in respect of the Arrangement, to the extent such
allowance or approval is required, on terms and conditions satisfactory to
the parties;
e. SEC Matters. The Registration Statement shall have been declared
effective under the Securities Act on or before the Effective Date, and at
its effective date and on the Closing Date the Registration Statement shall
not be the subject of any stop-order or proceedings seeking a stop-order,
and the Joint Proxy Statement shall, on the Closing Date, not be subject to
any similar proceedings commenced or threatened by the SEC or the
Commissions; and
f. Listings. The Devon Common Stock to be issued from time to time
after the Effective Time upon exchange of the Exchangeable Shares shall
have been approved for listing on the AMEX, and the Exchangeable Shares
shall be listed on the TSE or, in the absence of a listing on the TSE, on
another recognized Canadian stock exchange.
5.2 CONDITIONS PRECEDENT TO OBLIGATIONS OF NORTHSTAR
The obligations of Northstar to consummate and effect the transactions
contemplated hereunder shall be subject to the satisfaction or waiver on or
before the Effective Date of the following conditions:
a. Representations and Warranties. The representations and warranties
of Devon contained in this Agreement shall be true and correct on the date
hereof and (except to the extent such representations and warranties speak
as of a date earlier than the date hereof and except to give effect to the
issuance of shares of Devon Common Stock on exercise of outstanding options
or on exercise of options granted as permitted hereunder or pursuant to
rights under the Devon Rights Agreement or the grant of options to purchase
shares of Devon Common Stock as permitted hereunder) shall also be true and
correct on and as of the Effective Date, with the same force and effect as
if made on and as of the Effective Date except, where the failure of such
representations and warranties to be true and correct would not have a
Material Adverse Effect on Devon;
b. Covenants. Devon shall have performed and complied with all
covenants required by this Agreement to be performed or complied with by
Devon on or before the Effective Date except where such non-performance or
non-compliance in the reasonable judgment of Northstar would not
individually or in the aggregate have a Material Adverse Effect on either
Devon or Northstar or materially impede the completion of the Arrangement
or the other transactions contemplated in this Agreement;
c. Certificate. Devon shall have delivered to Northstar a certificate,
dated the Effective Date and signed by its chief executive officer and its
chief financial officer, to the effect set forth in Sections 5.2(a) and
(b); and
d. Affiliates Agreements. Devon shall have furnished copies to
Northstar of the Devon affiliates agreements referred to Section 7.6(a).
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5.3 CONDITIONS PRECEDENT TO OBLIGATIONS OF DEVON
The obligations of Devon to consummate and effect the transactions
contemplated hereunder shall be subject to the satisfaction or waiver on or
before the Effective Date of the following conditions:
a. Representations and Warranties. The representations and warranties
of Northstar contained in this Agreement shall be true and correct on the
date hereof and (except to the extent such representations and warranties
speak as of a date earlier than the date hereof and except to give effect
to the issuance of Northstar Common Shares on exercise of outstanding
options or on exercise of options granted as permitted hereunder or the
grant of options to purchase Northstar Common Shares as permitted
hereunder) shall also be true and correct on and as of the Effective Date,
with the same force and effect as if made on and as of the Effective Date
except, where the failure of such representations and warranties to be true
and correct would not have a Material Adverse Effect on Northstar;
b. Covenants. Northstar shall have performed and complied with all
covenants required by this Agreement to be performed or complied with by
Northstar on or before the Effective Date except where such non-performance
or non-compliance in the reasonable judgment of Devon would not
individually or in the aggregate have a Material Adverse Effect on either
Devon or Northstar or materially impede the completion of the Arrangement
or the other transactions contemplated in this Agreement;
c. Certificate. Northstar shall have delivered to Devon a certificate,
dated the Effective Date and signed by its chief executive officer and its
chief financial officer, to the effect set forth in Sections 5.3(a) and
(b); and
d. Affiliates Agreements. Northstar shall have furnished copies to
Devon of the Northstar affiliates agreements referred to Section 7.6(a).
ARTICLE 6
TERMINATION
6.1 TERMINATION
This Agreement may be terminated at any time prior to the Effective Time,
whether before or after approval of the transactions contemplated hereby by the
securityholders entitled to vote of Devon or Northstar, as follows:
a. by mutual agreement of Northstar and Devon;
b. by Northstar, if there has been a breach by Devon of any
representation, warranty, covenant or agreement set forth in this Agreement
on the part of Devon, or if any representation or warranty of Devon shall
have become untrue, in either case which has or can reasonably be expected
to have a Material Adverse Effect on Devon, and which Devon fails to cure
within 15 business days after written notice thereof from Northstar (except
that no cure period shall be provided for a breach by Devon which by its
nature cannot be cured);
c. by Devon, if there has been a breach by Northstar of any
representation, warranty, covenant or agreement set forth in this Agreement
on the part of Northstar, or if any representation or warranty of Northstar
shall have become untrue, in either case which has or can reasonably be
expected to have a Material Adverse Effect on Northstar, and which
Northstar fails to cure within 15 business days after written notice
thereof from Devon (except that no cure period shall be provided for a
breach by Northstar which by its nature cannot be cured);
d. by either party, if all the conditions for Closing the Arrangement
shall not have been satisfied or waived on or before 5:00 p.m., Calgary,
Alberta time on March 31, 1999, other than as a result of a breach of this
Agreement by the terminating party;
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e. by either party: (i) if the securityholders of Northstar do not
approve the Arrangement (and the other matters to be approved at such
meeting as provided in Section 7.1 hereof) at the Northstar Shareholders
Meeting; or (ii) if the stockholders of Devon do not approve at the Devon
Stockholders Meeting the issuance of Devon Common Stock issuable upon the
exchange of the Exchangeable Shares (and the other matters to be approved
at such meeting as provided in Section 7.1 hereof);
f. by either party if a final and non-appealable order shall have been
entered in any action or proceeding before any Governmental Entity that
prevents or makes illegal the consummation of the Arrangement;
g. by Northstar if the Devon board of directors or any committee of
the Devon board of directors shall withdraw or modify in any adverse manner
its approval or recommendation of this Agreement, the Arrangement and the
other transactions contemplated hereby;
h. by Devon if the Northstar board of directors or any committee of
the Northstar board of directors shall withdraw or modify in any adverse
manner its approval or recommendation of this Agreement, the Arrangement
and the other transactions contemplated hereby other than in the
circumstances contemplated by Section 4.2(o);
i. by Northstar, prior to the approval of this Agreement, the
Arrangement and the other transactions contemplated hereby by the
securityholders of Northstar if, as a result of a Superior Proposal by a
party other than Devon or any of its affiliates, Northstar's board of
directors determines in accordance with Section 4.2(o) to accept,
recommend, approve or implement such Superior Proposal and has otherwise
complied with the provisions of Section 4.2(o); or
j. by Northstar, if Devon shall have approved, or agreed to or
announced any agreement to effect, any transaction or transactions that
would result in any person, or any group of persons acting jointly or in
concert acquiring beneficial ownership of more than 50% of the issued and
outstanding capital stock of Devon or in Devon disposing of more than 50%
of its assets.
6.2 NOTICE OF TERMINATION
Any termination of this Agreement under Section 6.1 above will be effected
by the delivery of written notice by the terminating party to the other party
hereto.
6.3 EFFECT OF TERMINATION
Subject to Section 6.4, in the event of termination of this Agreement by
either Northstar or Devon pursuant to Section 6.1, this Agreement shall
forthwith become void and have no effect, and there shall be no liability or
obligation on the part of Devon or Northstar or their respective officers or
directors, except that: (i) the provisions of the Confidentiality Agreement
dated June 16, 1998 shall survive any such termination and abandonment; and (ii)
no party shall be released or relieved from any liability arising from the
willful breach by such party of any of its representations, warranties,
covenants or agreements as set forth in this Agreement.
6.4 TERMINATION FEE
a. If this Agreement is terminated (i) by Northstar pursuant to Section
6.1(b), or (ii) by either party pursuant to Section 6.1(e)(ii), then Devon shall
pay to Northstar a cash termination fee of $4,000,000 Canadian at the time of
such termination.
b. If this Agreement is terminated: (i) by Devon pursuant to Section
6.1(c); or (ii) by either party pursuant to Section 6.1(e)(i), then Northstar
shall pay to Devon a cash termination fee of $4,000,000 Canadian at the time of
such termination.
c. If this Agreement is terminated by Northstar pursuant to Section 6.1(i),
then Northstar shall pay to Devon upon such termination a cash termination fee
of $23,000,000 Canadian at the time of such termination.
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d. If this Agreement is terminated by Devon pursuant to Section 6.1(h),
then Northstar shall pay to Devon upon such termination a cash termination fee
of $23,000,000 Canadian at the time of such termination.
e. If this Agreement is terminated by Northstar pursuant to Section 6.1(g)
or Section 6.1(j) then Devon shall pay to Northstar upon such termination a cash
termination fee of $23,000,000 Canadian at the time of such termination.
f. Devon and Northstar each agree that the agreements contained in Sections
6.4(a) through 6.4(e) are an integral part of the transactions contemplated by
this Agreement. If either party fails to promptly pay the other party any fee
due under such Sections 6.4(a) through 6.4(e), it shall pay the other party's
costs and expenses (including legal fees and expenses) in connection with any
action, including the filing of any lawsuit or other legal action, taken to
collect payment, together with interest on the amount of any unpaid fee at the
publicly announced prime rate of Canadian Imperial Bank of Commerce from the
date such fee was first due.
ARTICLE 7
ADDITIONAL AGREEMENTS
Devon and Northstar each agree to take the following actions after the
execution of this Agreement.
7.1 MEETINGS
Northstar and Devon shall each duly call a meeting of its securityholders
entitled to vote to be held within 45 days after the SEC has indicated that it
has no further comments on the Joint Proxy Statement for the purpose of: (a) in
the case of Northstar, voting upon: (i) the Plan of Arrangement and the
transactions contemplated hereby and thereby; and (b) in the case of Devon,
voting upon: (i) a proposal to approve the issuance of such number of shares of
Devon Common Stock as are necessary to consummate the Arrangement including
those issuable on the exchange of the Exchangeable Shares; and (ii) a proposal
to adopt the Devon Restated Charter and each shall, through its board of
directors, recommend to its securityholders in the Joint Proxy Statement
approval of such matters and shall coordinate and cooperate with respect to the
timing of such meetings. Each party may only change such recommendation in the
event that the board of directors of such party concludes, in good faith, after
receiving the written advice of outside counsel that such action is necessary
for the board of directors to act in a manner consistent with its fiduciary
duty. The meetings of securityholders of Northstar and Devon will be called for
the same day at such times as will result in the completion of the Devon
Stockholders Meeting prior to the commencement of the Northstar Shareholders
Meeting.
7.2 THE CLOSING
Subject to the termination of this Agreement as provided in Article 6, the
Closing of the transactions contemplated by this Agreement (the "Closing") will
take place at the offices of Burnet, Duckworth & Palmer, 1400, 350 - 7th Avenue
S.W., Calgary, Alberta, T2P 3N9 on a date (the "Closing Date") and at a time to
be mutually agreed upon by the parties, which date shall be no later than the
first business day after all conditions to Closing set forth herein shall have
been satisfied or waived, unless another place, time and date is mutually
selected by Northstar and Devon. Each of Devon and Northstar hereby agree to use
their reasonable best efforts to cause their respective Canadian and United
States legal counsel to render opinions, dated as of the Effective Date, in
respect of such matters related to the transactions contemplated by this
Agreement and the Arrangement as may be reasonably requested by the other party.
Concurrently with the Closing, the Plan of Arrangement will be filed with the
Registrar under the ABCA.
7.3 ANCILLARY DOCUMENTS/RESERVATION OF SHARES
a. Provided all other conditions of this Agreement have been satisfied or
waived, Northstar shall, on the Closing Date, file Articles of Arrangement
pursuant to Section 186 of the ABCA to give effect to the Plan of Arrangement,
such Articles of Arrangement to contain share conditions for Exchangeable Shares
substantially in the form of those contained in Exhibit C.
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b. On the Effective Date:
i. Devon shall execute and deliver a Support Agreement containing the
terms and conditions set forth in Exhibit D, together with such other terms
and conditions as may be agreed to by the parties hereto acting reasonably;
ii. Devon, Northstar and a Canadian trust company to be mutually
agreeable to Devon and Northstar, acting reasonably, shall execute and
deliver a Voting and Exchange Trust Agreement containing the terms and
conditions set forth in Exhibit E, together with such other terms and
conditions as may be agreed to by the parties hereto acting reasonably; and
iii. Devon shall file with the Secretary of State of Oklahoma a
Restated Certificate of Incorporation which shall be in substantially the
form set forth in Exhibit B.
c. On or before the Effective Date, Devon will reserve for issuance such
number of shares of Devon Common Stock as shall be necessary to give effect to
the exchanges and assumptions or exchanges of options contemplated hereby.
7.4 CONVERSION OF OPTIONS
Promptly after the Effective Time, Devon will notify in writing each holder
of a Northstar Option of the conversion of such Northstar Option for an option
to purchase Devon Common Stock in accordance with Section 1.4 hereof.
7.5 INDEMNIFICATION AND RELATED MATTERS
a. Devon agrees that all rights to indemnification existing in favor of the
present or former directors and officers of Northstar (as such) or any of the
Northstar Subsidiaries or present or former directors and officers (as such) of
Northstar or any of the Northstar Subsidiaries serving or who served at
Northstar's or any of the Northstar Subsidiaries' request as a director,
officer, employee, agent or representative of another corporation, partnership,
joint venture, trust, employee benefit plan or other enterprise (each such
present or former director or officer of Northstar or any of the Northstar
Subsidiaries, an "Indemnified Party"), as provided by contract or in Northstar's
charter or bylaws or similar documents of any of the Northstar Subsidiaries in
effect as of the date hereof with respect to matters occurring prior to the
Effective Time, shall survive and shall continue in full force and effect and
without modification for a period of not less than the statutes of limitations
applicable to such matters.
b. From and after the Effective Time, Devon and Northstar, jointly and
severally, shall and shall cause Northstar to indemnify and hold harmless to the
fullest extent permitted under the ABCA, each Indemnified Party against any
costs and expenses (including reasonable attorney's fees), judgments, fines,
losses, claims and damages and liabilities, and amounts paid in settlement
thereof with the consent of the indemnifying party, such consent not to be
unreasonably withheld, in connection with any actual or threatened claim,
action, suit, proceeding or investigation that is based on, or arises out of,
the fact that such person is or was a director or officer of Northstar or any
Northstar Subsidiary (including without limitation with respect to any of the
transactions contemplated hereby or the Arrangement) or who is serving or who
served at Northstar's or any of the Northstar Subsidiaries' request as a
director, officer, employee, agent or representative of another corporation,
partnership, joint venture, trust, employee benefit plan or other enterprise. In
the event of any such claim, action, suit, proceeding or investigation, Devon
shall cause Northstar to pay the reasonable fees and expenses of counsel in
advance of the final disposition of any such claim, action, suit, proceeding or
investigation to the fullest extent permitted by law subject to the limitations
imposed by the ABCA. Without limiting the foregoing, in the event any such
claim, action, suit, proceeding or investigation is brought against any
Indemnified Parties, (i) the Indemnified Parties may retain counsel reasonably
satisfactory to Devon and, subject to limitations imposed by the ABCA, Northstar
shall (or Devon shall cause Northstar to) pay all reasonable fees and expenses
of such counsel for the Indemnified Parties promptly as statements therefor are
received; and (ii) Devon will use all reasonable efforts to assist in the
defense of such matter; provided, however, that neither Northstar nor Devon
shall be liable for any settlement effected without its prior written
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consent which shall not be unreasonably withheld. Any Indemnified Party wishing
to claim indemnification under this Section 7.5(b), upon learning of any such
claim, action, suit, proceeding or investigation, shall notify Devon (but the
failure to so notify shall not relieve a party from any liability which it may
have under this Section 7.5(b) unless such failure results in actual prejudice
to such party and then only to the extent of such prejudice). The Indemnified
Parties as a group may retain only one law firm in any jurisdiction to represent
them with respect to each such matter unless such counsel determines that there
is, under applicable standards of professional conduct, a conflict on any
significant issue between the positions of any two or more Indemnified Parties,
in which event additional counsel may be required to be retained by the
Indemnified Parties.
c. Subject to limitations imposed by the ABCA, provided the Arrangement
becomes effective, Northstar shall (or Devon shall cause Northstar to) pay all
expenses, including reasonable attorney's fees, as the same may be incurred by
any Indemnified Parties in any action by any Indemnified Party or parties
seeking to enforce the indemnity or other obligations provided for in this
Section 7.5; provided, however, that Northstar will be entitled to reimbursement
for any advances made under this Section 7.5 to any Indemnified Party who
ultimately proves unsuccessful in enforcing the indemnity as finally determined
by a non-appealable judgment in a court of competent jurisdiction, and payment
of such expenses in advance of the final disposition of the action shall be made
only upon receipt of any undertaking by the Indemnified Party to reimburse all
amounts advanced if such action ultimately proves unsuccessful.
d. Provided the Arrangement becomes effective, for a period of six years
after the Effective Date, Devon shall continue in effect director and officer
liability insurance for the benefit of the Indemnified Parties in such amounts,
and with such deductibles, retained amounts, coverages and exclusions as
Northstar provides for its own directors and officers at the date hereof.
e. This Section 7.5, which shall survive the consummation of this Agreement
and the Arrangement, is intended to benefit each person or entity indemnified
hereunder.
7.6 AFFILIATE AND SHAREHOLDERS AGREEMENTS
a. Northstar will use its reasonable best efforts to have its Affiliates
sign and deliver to Devon the Northstar Affiliate Agreements in the form of
Exhibit "F" on or before July 17, 1998. Devon will use its reasonable best
efforts to have its Affiliates sign and deliver to Devon the Devon Affiliate
Agreements in the form of Exhibit "G" on or before July 17, 1998. For purposes
of this Agreement, an "Affiliate" shall have the meaning referred to in SEC
Accounting Series Releases 130 and 135 and in Rule 145 under the Securities Act.
In the event that either Devon or Northstar does not succeed in getting its
respective Affiliates to sign and deliver the Affiliate Agreements, such party
shall continue to use its reasonable best efforts to have its Affiliates sign
and deliver the Affiliate Agreements.
b. Northstar will use its reasonable best efforts to have each of Gordon
Stollery and John Hagg sign and deliver to Devon on or before July 17, 1998 a
shareholders agreement (the "Northstar Shareholders Agreements") which will
provide that such person will vote the Northstar Shares beneficially owned by
him as at the date of the Northstar Shareholders Meeting in favour of the
matters set forth in Section 7.1. Devon will use its reasonable best efforts to
have Kerr-McGee Corporation and Larry Nichols sign and deliver to Northstar on
or before July 17, 1998 a shareholders agreement (the "Devon Shareholders
Agreement") which will include provisions stating that such persons will vote
the shares of Devon Common Stock beneficially owned by them as at the date of
the Devon Stockholders Meeting in favour of the matters set forth in Section
7.1. In the event that either Northstar or Devon fails to deliver such
agreements on or before July 17, 1998, Devon or Northstar, as the case may be,
shall continue to use its reasonable best efforts to have such agreements signed
and delivered.
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ARTICLE 8
MISCELLANEOUS
8.1 NO SURVIVAL OF REPRESENTATIONS AND WARRANTIES
All representations and warranties of the parties contained in this
Agreement will remain operative and in full force and effect, regardless of any
investigation made by or on behalf of the parties to this Agreement, until the
earlier of the valid termination of this Agreement or the Closing Date,
whereupon such representations and warranties will expire and be of no further
force or effect. All agreements and covenants of the parties shall survive the
Closing Date, except as otherwise set forth in this Agreement.
8.2 NOTICES
All notices and other communications hereunder shall be in writing and
shall be deemed given if delivered personally or by recognized overnight
courier, by facsimile (receipt confirmed) or mailed by certified mail (return
receipt requested) to the parties at the following addresses (or at such other
address for a party as shall be specified by like notice):
a. if to Devon to: Devon Energy Corporation, 20 North Broadway, Suite
1500, Oklahoma City, Oklahoma 73102-8260, Attention: President, Facsimile
No. 405-552-8171, with required copies to McAfee & Taft A Professional
Corporation, 10th Floor, Number Two Leadership Square, 211 North Robinson,
Oklahoma City, Oklahoma 73102, Attention: Gary F. Fuller, Facsimile No.
405-235-0439, and to Burnet, Duckworth & Palmer, Suite 1400, 350 -- 7th
Avenue S.W., Calgary, Alberta, T2P 3L8, Attention: Grant A. Zawalsky,
Facsimile No. 403-260-0330.
b. if to Northstar to: Northstar Energy Corporation, 3000, 400 -- 3rd
Avenue S.W., Calgary, Alberta, Canada, T2P 4H2, Attention: President,
Facsimile No. 403-213-8100, with required copies to Bennett Jones Verchere,
Suite 4500, 855 -- 2nd Street S.W., Calgary, Alberta, T2P 4K7, Attention:
Martin A. Lambert, Facsimile No. 403-265-7219 and Bogle & Gates P.L.L.C.,
Two Union Square, 601 Union Street, Seattle, Washington, 98101-2346,
Attention: Christopher J. Barry, Facsimile No. 206-621-2660.
8.3 INTERPRETATION
When a reference is made in this Agreement to Sections or Exhibits, such
reference shall be to a Section or Exhibit to this Agreement unless otherwise
indicated. The words "include," "includes" and "including" when used therein
shall be deemed in each case to be followed by the words "without limitation."
The headings contained in this Agreement are for reference purposes only and
shall not affect in any way the meaning or interpretation of this Agreement.
8.4 SEVERABILITY
If any provision of this Agreement or the application thereof to any person
or circumstance is held invalid or unenforceable in any jurisdiction, the
remainder hereof, and the application of such provision to such person or
circumstance in any other jurisdiction or to other persons or circumstances in
any jurisdiction, shall not be affected thereby, and to this end the provisions
of this Agreement shall be severable.
8.5 COUNTERPARTS
This Agreement may be executed in one or more counterparts, all of which
shall be considered one and the same agreement and shall become effective when
one or more counterparts have been signed by each of the parties and delivered
to each of the other parties, it being understood that all parties need not sign
the same counterpart.
8.6 MISCELLANEOUS
This Agreement, which includes the Northstar Disclosure Letter, the Devon
Disclosure Letter and the Exhibits hereto and the Confidentiality Agreement
dated June 16, 1998 between Devon and Northstar, and any other documents
referred to herein or contemplated hereby (a) constitutes the entire agreement
between the parties with respect to the subject matter hereof and supersede all
prior agreements and understandings, both written and oral, among the parties
with respect to the subject matter hereof; (b) are not intended to
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confer upon any other person any rights or remedies hereunder (except that
Section 7.5 is for the benefit of Northstar's directors and officers and is
intended to confer rights on such persons); and (c) shall not be assigned by
operation of law or otherwise except as otherwise specifically provided.
8.7 GOVERNING LAW
This Agreement shall be governed by and construed in accordance with the
laws of the Province of Alberta (regardless of the laws that might otherwise
govern under applicable principles of conflicts of law) as to all matters,
including without limitation validity, construction, effect, performance and
remedies.
8.8 AMENDMENT AND WAIVERS
Any term or provision of this Agreement may be amended, and the observance
of any term of this Agreement may be waived (either generally or in a particular
instance and either retroactively or prospectively) only by a writing signed by
the party to be bound thereby which writing expressly refers to this Agreement
and the operation of the provisions of this Section 8.8. The waiver by a party
of any breach hereof or default in the performance hereof will not be deemed to
constitute a waiver of any other default or any succeeding breach or default.
This Agreement may be amended by the parties hereto at any time before or after
approval of the Northstar securityholders or the Devon stockholders, but, after
such approval, no amendment will be made which by applicable law requires the
further approval of the Northstar securityholders or the Devon stockholders
without obtaining such further approval.
8.9 EXPENSES
Except as otherwise provided herein, each party will bear its respective
expenses and legal fees incurred with respect to this Agreement and the
transactions contemplated hereby.
IN WITNESS WHEREOF, Devon and Northstar have caused this Agreement to be
signed by their respective officers thereunder duly authorized, all as of the
date first written above.
DEVON ENERGY CORPORATION
Per: (signed) J. LARRY NICHOLS
----------------------------------
J. Larry Nichols
President and Chief Executive
Officer
NORTHSTAR ENERGY CORPORATION
Per: (signed) JOHN A. HAGG
----------------------------------
John A. Hagg
President and Chief Executive
Officer
Per: (signed) DON A. GARNER
----------------------------------
Don A. Garner
Executive Vice President and
Chief Operating Officer
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ANNEX C
IN THE COURT OF QUEEN'S BENCH OF ALBERTA
JUDICIAL DISTRICT OF CALGARY
IN THE MATTER OF Section 186 of the
Business Corporations Act (Alberta),
being Chapter B-15, of the Statutes of
Alberta, 1981, as amended;
AND IN THE MATTER OF a proposed
Arrangement among Northstar Energy
Corporation and its security holders,
and Devon Energy Corporation
<TABLE>
<S> <C>
BEFORE THE HONOURABLE CHIEF JUSTICE W. AT THE COURT HOUSE, IN THE CITY OF
K. MOORE IN CHAMBERS CALGARY, IN THE PROVINCE OF ALBERTA ON
FRIDAY, THE 30TH DAY OF OCTOBER, 1998.
</TABLE>
INTERIM ORDER
UPON the application by Petition of Northstar Energy Corporation
("Northstar") pursuant to s.186 of the Business Corporations Act (Alberta) (the
"ABCA");
AND UPON reading the said Petition, and the Affidavit of John Richels,
Executive Vice President and Chief Financial Officer of Northstar;
AND UPON it appearing that notice of this application has been provided to
the Executive Director of the Alberta Securities Commission;
AND UPON hearing counsel for the Petitioner and counsel for Devon Energy
Corporation;
IT IS HEREBY ORDERED THAT:
1. Northstar shall convene a special meeting (the "Meeting") of the holders
of its issued and outstanding common shares (the "Common Shares") and options to
purchase Common Shares (the "Options") to consider, and if deemed advisable, to
pass, with or without variation, a resolution (the "Arrangement Resolution") to
approve an arrangement (the "Arrangement") under section 186 of the ABCA
involving Northstar, its said holders of Common Shares (the "Shareholders") and
Options (the "Optionholders") which is set forth in a Plan of Arrangement (the
"Plan of Arrangement"), a true copy of which Plan of Arrangement in a
substantially final form is included as Annex E to Exhibit "A" to the Affidavit
of John Richels sworn the 30th day of October, 1998.
2. The Meeting shall be called, held and conducted in accordance with the
ABCA and the Articles of Amalgamation and the Bylaws of Northstar subject to
what may be provided hereafter.
3. The only persons entitled to notice of the Meeting shall be the
registered Shareholders and the Optionholders as they may appear on the records
of Northstar as at the close of business on the 27th day of October, 1998, the
directors and auditors of Northstar, the Registrar of Corporations under the
ABCA and the Alberta Securities Commission, and the only persons entitled to be
represented and to vote at the Meeting, either in person or by proxy, shall be
such Shareholders and Optionholders, subject to the provisions of Section 132 of
the ABCA.
4. Northstar shall mail the Notice of the Special Meeting of Shareholders
and Optionholders, Notice of Petition, and Joint Management Information Circular
and Proxy Statement (the "Proxy Circular") in substantially the form contained
in Exhibit "A" to the Affidavit of John Richels, with such amendments thereto as
counsel for Northstar may advise are necessary or desirable, provided that such
amendments are not inconsistent with the terms of this Order, to the
Shareholders, to the Optionholders, to the directors and auditors of Northstar,
the Registrar of Corporations under the ABCA and to the Alberta Securities
Commission by mailing the same by prepaid ordinary mail to such persons at least
21 days prior to the date of the Meeting, excluding the date of mailing and
excluding the date of the Meeting. Such mailing shall
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constitute good and sufficient service of notice of the Petition, the Meeting
and the hearing in respect of the Petition.
5. The accidental omission to give notice of the Meeting, or the
non-receipt of such notice by one or more of the persons specified in paragraph
4 hereof, shall not invalidate any resolution passed or proceedings taken at the
Meeting.
6. Each Common Share shall be entitled to one vote and each Option shall be
entitled to one vote with respect to each Common Share subject thereto on each
matter to be acted upon at the Meeting. The majority required to pass the
Arrangement Resolution shall be not less than 66 2/3% of the aggregate votes
actually cast by the Shareholders and the Optionholders (present in person or by
proxy) and voting together in respect of the Arrangement Resolution at the
Meeting (not counting for this purpose abstentions, spoiled votes, illegible
votes and/or defective votes).
7. The Shareholders who are registered Shareholders, and the Optionholders,
shall have the right to dissent from the Arrangement Resolution in the same
fashion as provided for under the provisions of Section 184 of the ABCA, except
as modified hereby and the Plan of Arrangement and to be paid the fair value of
their Common Shares, or Options, provided that:
(a) notwithstanding subsection 184(5) of the ABCA, the written
objection to the Arrangement Resolution referred to in subsection 184(5) of
the ABCA which is required to be sent to Northstar must be received by
Northstar, c/o CIBC Mellon Trust Company at 600, 333-7th Avenue S.W.,
Calgary, Alberta T2P 2Z1, or the Chairman of the Meeting, before
commencement of the Meeting; and
(b) the Shareholders and Optionholders exercising such right of
dissent have otherwise complied with the requirements of Section 184 of the
ABCA.
8. Upon approval of the Plan of Arrangement at the Meeting in the manner
set forth in this Order, Northstar may apply before this Court for approval of
the Plan of Arrangement, which application (the "Final Application") shall be
heard by this Honourable Court at the Court House, 611 - 4th Street S.W., in the
City of Calgary, on the 10th day of December, 1998 at 1:30 p.m. or so soon
thereafter as counsel may be heard.
9. Any Shareholder, Optionholder and any interested person may appear on
the application for the approval of the Arrangement, provided that such holder
or person shall file with this Court and serve on Northstar, c/o Northstar's
solicitors, at the address set forth below and on Devon, c/o Burnet, Duckworth &
Palmer, 1400, 350-7th Avenue S.W., Calgary, Alberta, Canada T2P 3N9, Attention
Grant A. Zawalsky, on or before December 1, 1998, a Notice of Intention to
Appear setting out the address for service in respect of such holder or person,
and indicating whether such holder or person intends to support or oppose the
application or make submissions thereat together with any evidence or materials
which are to be presented to this Court, such Notice of Appearance to be
effected by delivery to the solicitors for Northstar and Devon, at the address
set forth below:
<TABLE>
<S> <C>
Bennett Jones Verchere Burnet Duckworth & Palmer
4500 Bankers Hall East 1400 First Canadian Centre
855 - 2nd Street, S.W. 350 - 7th Avenue, S.W.
Calgary, Alberta, Canada Calgary, Alberta, Canada
T2P 4K7 T2P 3N9
Attention: A. L. Friend, Q.C. Attention: Grant A. Zawalsky
Counsel to Northstar Counsel to Devon Energy Corporation
</TABLE>
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<PAGE> 237
10. In the event the Final Application is adjourned, only those persons who
have filed and served a Notice of Appearance shall be served with notice of the
adjourned date.
11. Northstar shall be entitled at any time to seek leave to vary this
Order.
(signed) W.K. MOORE
------------------------------------
C.J.C.Q.B.A.
ENTERED this 30th day of October, 1998.
(signed) JIM MCLAUGHLIN
- ------------------------------------------------------------
Clerk of the Court of Queen's Bench of Alberta
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<PAGE> 238
ACTION NO: 9801-14734 October 30, 1998
- ------------------------------------------------------------
IN THE COURT OF QUEEN'S BENCH
OF ALBERTA
JUDICIAL DISTRICT OF CALGARY
- ------------------------------------------------------------
BETWEEN:
IN THE MATTER OF Section 186 of the Business Corporations Act (Alberta), being
Chapter B-15, of the Statutes of Alberta, 1981, as amended;
AND IN THE MATTER OF a proposed Arrangement among Northstar Energy Corporation
and its security holders, and Devon Energy Corporation
- ------------------------------------------------------------
INTERIM ORDER
- ------------------------------------------------------------
BENNETT JONES VERCHERE
Barristers and Solicitors
4500 Bankers Hall East
855 - 2nd Street S.W.
CALGARY, Alberta
T2P 4K7
Anthony L. Friend, Q.C.
Telephone (403) 298-3182
Our File No. 15528-239
C-4
<PAGE> 239
ANNEX D
PROPOSED AMENDED AND RESTATED
CERTIFICATE OF INCORPORATION
The undersigned, J. Larry Nichols and Marian J. Moon, certify that they are
the President and Chief Executive Officer and Corporate Secretary, respectively,
of Devon Energy Corporation, a corporation organized and existing under the laws
of the State of Oklahoma (the "Corporation"), and do hereby further certify as
follows:
1. The name of this Corporation is Devon Energy Corporation.
2. The name under which the Corporation was originally incorporated
was Devon Oklahoma Corporation. The original Certificate of Incorporation
of the Corporation was filed with the Secretary of State of Oklahoma on
April 13, 1995, with amendments thereto filed on June 7, 1995 and December
31, 1996.
3. This Amended and Restated Certificate of Incorporation was duly
adopted in accordance with the provisions of Sections 1077 and 1080 of the
Oklahoma General Corporation Act (the "Act") by the affirmative vote of the
holders of not less than a majority of the outstanding stock of the
Corporation entitled to vote thereon at a special meeting duly called and
held in accordance with the provisions of the Act.
4. The text of the Certificate of Incorporation of the Corporation is
amended and restated to read in its entirety as follows:
FIRST. The name of the Corporation is:
DEVON ENERGY CORPORATION
SECOND. The address, including the street, number, city and county, of the
Corporation's registered office in this state is 735 First National Building,
Oklahoma City, Oklahoma 73102; the name of the Corporation's registered agent at
such address is The Corporation Company.
THIRD. The nature of the business and the purpose of the Corporation shall
be any and all lawful acts or activities for which a corporation may be
organized under the general corporation law of Oklahoma.
FOURTH. The total number of shares of capital stock which the Corporation
shall have authority to issue is 403,000,001 shares, consisting of 3,000,000
shares of Preferred Stock, par value $1.00 per share, and 400,000,000 shares of
Common stock, par value $.10 per share and one share of Special Voting Stock,
par value $.10 per share. Except as otherwise provided herein or as otherwise
required by applicable law, all shares of Special Voting Stock and Common Stock
shall be identical in all respects and shall entitle the holders thereof to the
same rights and privileges, subject to the same qualifications, limitations and
restrictions. The preferences, qualifications, limitations, restrictions and the
special or relative rights in respect of the shares of each class are as
follows:
DIVISION A
EXPRESS TERMS OF THE PREFERRED STOCK
Section 1. The Preferred Stock may be issued from time to time in one or
more series. All shares of Preferred Stock shall be of equal rank and shall be
identical, except in respect of the matters that may be fixed and determined by
the board of directors as hereinafter provided, and each share of each series
shall be identical with all other shares of such series, except as to the date
from which dividends are cumulative. The board of directors hereby is authorized
to cause such shares to be issued in one or more series and with respect to each
such series prior to the issuance thereof to fix and determine the designation,
powers, preferences and rights of the shares of each such series and the
qualifications, limitations or restrictions thereof.
D-1
<PAGE> 240
The authority of the board with respect to each series shall include but
not be limited to, determination of the following:
(a) The designation of the series, which may be by distinguishing
number, letter or title.
(b) The number of shares of the series, which number the board of
directors may (except where otherwise provided in the creation of the
series) increase or decrease (but not below the number of shares thereof
then outstanding).
(c) The annual dividend rate or amount of the series, if any, and
whether dividends shall be cumulative or non-cumulative.
(d) The dates at which dividends, if declared, shall be payable, and
the dates from which dividends shall be cumulative, if at all, and the
relative rights of priority, if any, of payment of dividends on shares of
that series.
(e) The redemption rights, if any, for shares of the series and the
terms and conditions of such redemption, including the date or dates upon
or after which they shall be redeemable, and the amount per share payable
in case of redemption, which amount may vary with different conditions and
at different redemption dates.
(f) The voting rights of such shares, if any, and the terms of and
limitations on such voting rights.
(g) The terms and amount of any sinking fund provided for the purpose
of redemption or purchase of shares of the series.
(h) The amounts payable on shares of the series and rights with
respect to such shares in the event of any voluntary or involuntary
liquidation, dissolution or winding up of the affairs of the Corporation,
and the relative rights of priority, if any, of payment of shares of that
series.
(i) Whether the shares of the series shall be convertible into shares
of any other class or classes of securities or of any other series of the
same or any other class or classes of stock, or any other security, of the
Corporation or any other corporation, and, if so, the conversion price or
prices, any adjustments thereof, and all other terms and conditions upon
which such conversion may be made.
(j) Restrictions, if any, on the issuance of shares of the same series
or of any other class or series.
DIVISION B
EXPRESS TERMS OF THE COMMON STOCK
The Common Stock shall be subject to the express terms of the Preferred
Stock and any series thereof. Each share of Common Stock shall be equal to every
other share of Common Stock. The holders of shares of Common Stock shall be
entitled to one vote for each share of such stock upon all matters presented to
the stockholders.
D-2
<PAGE> 241
DIVISION C
EXPRESS TERMS OF THE SPECIAL VOTING STOCK
Each outstanding share of Special Voting Stock shall be entitled at any
relevant date to the number of votes determined in accordance with the "Plan of
Arrangement" (as that term is defined in that certain Amended and Restated
Combination Agreement dated as of June 29, 1998 (as amended and restated from
time to time, the "Combination Agreement"), by and between the Corporation and
Northstar Energy Corporation) on all matters presented to the stockholders. No
dividend or distribution of assets shall be paid to the holders of Special
Voting Stock. The Special Voting Stock is not convertible into any other class
or series of the capital stock of the Corporation or into cash, property or
other rights, and may not be redeemed. Any shares of Special Voting Stock
purchased or otherwise acquired by the Corporation shall be deemed retired and
shall be canceled and may not thereafter be reissued or otherwise disposed of by
the Corporation. At such time as the Special Voting Stock has no votes attached
to it because there are no "Exchangeable Shares" (as that term is defined in the
Combination Agreement) outstanding, the Special Voting Stock shall be canceled.
In respect of all matters concerning the voting of shares, the Common Stock and
the Special Voting Stock shall vote as a single class and such voting rights
shall be identical in all respects.
FIFTH. The name and address of the incorporator is as follows:
<TABLE>
<CAPTION>
NAME MAILING ADDRESS
- ---- ---------------
<S> <C>
Jerry A. Warren Tenth Floor
Leadership Square
Oklahoma City, Oklahoma 73102
</TABLE>
SIXTH. The number of directors which shall constitute the whole board shall
not be less than three nor more than fifteen, and shall be determined by
resolution adopted by a vote of two-thirds ( 2/3) of the entire board, or at an
annual meeting of stockholders by the affirmative vote of the holders of capital
stock entitled to cast sixty-six and two-thirds percent (66 2/3%) of the votes
entitled to be cast at the meeting. No reduction in number shall have the effect
of removing any director prior to the expiration of his term. The provisions of
this Article shall not be altered, amended or repealed except by the affirmative
vote of the holders of capital stock entitled to cast at least sixty-six and
two-thirds percent (66 2/3%) of the votes entitled to be cast.
SEVENTH. For the management of the business and for the conduct of the
affairs of the Corporation, and in further definition, limitation and regulation
of the powers of the Corporation, its directors and its stockholders or any
class thereof, as the case may be, it is further provided that:
(a) No election of directors need be by written ballot.
(b) Except as otherwise provided herein, the power to adopt, amend or
repeal the bylaws is conferred on the board of directors.
EIGHTH. The Corporation elects that the Control Share Act as set forth in
Section 1145 through 1155 of Title 18 of the Oklahoma Statutes shall not apply
to the corporation. Furthermore, the Corporation elects not to be governed by
Section 1090.3 of Title 18 of the Oklahoma Statutes.
NINTH. No director of the Corporation shall be personally liable to the
Corporation or its stockholders for damages for breach of fiduciary duty as a
director, except for personal liability:
(a) for acts or omissions not in good faith or which involve
intentional misconduct or a knowing violation of law;
(b) under Section 1053 of the Oklahoma General Corporation Act;
(c) for any breach of the director's duty of loyalty to the
Corporation or its stockholders; or
(d) for any transaction from which the director derived an improper
personal benefit.
D-3
<PAGE> 242
TENTH. No action required to be taken or which may be taken at any annual
or special meeting of shareholders of the Corporation may be taken without a
meeting, and the power of shareholders to consent in writing without a meeting
to the taking of any action is specifically denied.
ELEVENTH.
(a) Notwithstanding any other provisions of Title 18 of the Oklahoma
Statutes, the Corporation shall not engage in any business combination with
any current or former interested shareholder for a period of three (3)
years following the date that such person became an interested shareholder,
unless:
(i) prior to the date on which a person becomes an interested
shareholder, the board of directors of the Corporation approved either
the business combination or the transaction which resulted in the person
becoming an interested shareholder;
(ii) upon consummation of the transaction which resulted in the
person becoming an interested shareholder, the interested shareholder
owned of record or beneficially capital stock having at least
eighty-five percent (85%) of all voting power of the Corporation at the
time the transaction commenced, excluding for purposes of determining
such voting power the votes attributable to those shares owned of record
or beneficially by:
a. persons who are directors and also officers, and
b. employee stock plans in which employee participants do not
have the right to determine confidentially whether shares held
subject to the plan will be tendered in a tender or exchange offer;
or
(iii) on or subsequent to such date, the business combination is
approved by the continuing board of directors and authorized at an
annual or special meeting of shareholders, and not by written consent,
by the affirmative vote of at least sixty-six and two-thirds percent
(66 2/3%) of all voting power which is not attributable to shares owned
of record or beneficially by the interested shareholder.
(b) The restrictions contained in this section shall not apply if:
(i) the business combination is proposed prior to the consummation
of the business transaction and subsequent to the earlier of the public
announcement or the notice required hereunder of, a proposed transaction
which:
a. constitutes one of the transactions described in subparagraph
(ii) of this paragraph,
b. is with or by a person who either was not an interested
shareholder during the previous three (3) years or who became an
interested shareholder with the approval of the Corporation's board
of directors, and
c. is approved or not opposed by a majority of the members of
the board of directors then in office, but not less than one, who
were directors prior to any person becoming an interested shareholder
during the previous three (3) years or were recommended for election
or elected to succeed such directors by a majority of such directors;
(ii) the proposed transactions referred to in subparagraph (i) of
this paragraph are limited to:
a. a share acquisition pursuant to Section 1090.1 of Title 18 of
the Oklahoma Statutes, or a merger or consolidation of the
Corporation, except for a merger in respect of which pursuant to
subsection F of Section 1081 of Title 18 of the Oklahoma Statutes, no
vote of the shareholders of the Corporation is required, or
b. a sale, lease, exchange, mortgage, pledge, transfer or other
disposition, in one transaction or a series of transactions, whether
as part of a dissolution or otherwise, of assets of the Corporation
or of any direct or indirect majority-owned subsidiary of the
Corporation, other
D-4
<PAGE> 243
than to any direct or indirect wholly-owned subsidiary or to the
Corporation, having an aggregate market value equal to fifty percent
(50%) or more of either the aggregate market value of all the assets
of the Corporation determined on a consolidated basis or the
aggregate market value of all the outstanding stock of the
Corporation, or
c. a proposed tender or exchange offer for outstanding stock of
the Corporation which represents fifty percent (50%) or more of all
voting power of the Corporation, or
(iii) a person becomes an interested shareholder inadvertently and:
a. as soon as practicable divests sufficient shares so that the
person ceases to be an interested shareholder, and
b. would not, at any time within the three (3) year period
immediately prior to a business combination between the Corporation
and such person, have been an interested shareholder but for the
inadvertent acquisition.
The Corporation shall give not less than twenty (20) days notice to
all interested shareholders prior to the consummation of any of the
transactions described in divisions (i) or (ii) of this subparagraph.
(c) As used in this section only:
(i) "affiliate" means a person that directly, or indirectly through
one or more intermediaries, controls, or is controlled by, or is under
common control with, another person;
(ii) "all voting power" means the aggregate number of votes which
the holders of all classes of capital stock of the Corporation would be
entitled to cast in an election of directors generally;
(iii) "associate", when used to indicate a relationship with any
person, means:
a. any corporation or organization of which such person is a
director, officer or partner or is, of record or beneficially, the
owner of outstanding stock of the Corporation having twenty percent
(20%) or more of all voting power of the Corporation,
b. any trust or other estate in which such person has at least a
twenty percent (20%) beneficial interest or as to which such person
serves as trustee or in a similar fiduciary capacity, and
c. any relative or spouse of such person, or any relative of
such spouse, who has the same residence of such person;
(iv) "beneficial ownership" shall have the meaning ascribed to such
term by Rule 13d-3 under the Securities Exchange Act of 1934, 15 U.S.C.
Section 78a et seq., as amended, except that a person shall be deemed to
be the owner or beneficial owner of securities of which he has the right
to acquire ownership either immediately or only after the passage of any
time or the giving of notice or both; provided, however, that a person
shall not be deemed the owner or beneficial owner of any stock if:
a. the agreement, arrangement or understanding to vote such
stock arises solely from a revocable proxy or consent given in
response to a proxy or consent solicitation made to more than ten
persons, or
b. the stock is tendered pursuant to a tender or exchange offer
made by such person or any of such person's affiliates or associates,
until such tendered stock is accepted for purchase or exchange;
D-5
<PAGE> 244
(v) "business combination", when used in reference to any
corporation and any interested shareholder of such corporation, means:
a. any merger or consolidation of the corporation or any direct
or indirect majority-owned subsidiary of the corporation with:
(1) the interested shareholder, or
(2) any other corporation if the merger or consolidation is
caused by the interested shareholder and as a result of such
merger or consolidation subsection (a) of this section is not
applicable to the surviving corporation,
b. any sale, lease, exchange, mortgage, pledge, transfer or
other disposition, in one transaction or a series of transactions,
except as proportionately as a shareholder of such corporation, to or
with the interested shareholder, whether as part of a dissolution or
otherwise, of assets of the corporation or of any direct or indirect
majority-owned subsidiary of the corporation which assets have an
aggregate market value equal to ten percent (10%) or more of either
the aggregate market value of all the assets of the corporation
determined on a consolidated basis or the aggregate market value of
all the outstanding stock of the corporation,
c. any transaction which results in the issuance or transfer by
the corporation or by any direct or indirect majority-owned
subsidiary of the corporation of any stock of the corporation or of
such subsidiary to the interested shareholder, except:
(1) pursuant to the exercise, exchange or conversion of
securities exercisable for, exchangeable for or convertible into
stock of such corporation or any such subsidiary which securities
were outstanding prior to the time that the interested
shareholder became such,
(2) pursuant to a dividend or distribution paid or made, or
the exercise, exchange or conversion of securities exercisable
for, exchangeable for or convertible into stock of such
corporation or any such subsidiary which security is distributed,
pro rata to all holders of a class or series of stock of such
corporation subsequent to the time the interested shareholder
became such, or
(3) pursuant to an exchange offer by the corporation to
purchase stock made on the same terms to all holders of said
stock; provided, however, that in no case under divisions (2) and
(3) of this subparagraph shall there be an increase in the
interested shareholder's proportionate share of the stock of any
class or series of the corporation or of all voting power of the
corporation,
d. any transaction involving the corporation or any direct or
indirect majority-owned subsidiary of the corporation which has the
effect, directly or indirectly, of increasing the proportionate share
of the stock of any class or series, or securities convertible into
the stock of any class or series, or all voting power, of the
corporation or of any such subsidiary which is owned by the
interested shareholder, except as a result of immaterial changes due
to fractional share adjustments or as a result of any purchase or
redemption of any shares of stock not caused, directly or indirectly,
by the interested shareholder,
e. any receipt by the interested shareholder of the benefit,
directly or indirectly, except proportionately as a shareholder of
such corporation, of any loans, advances, guarantees, pledges, or
other financial benefits, other than those expressly permitted in
subparagraphs a. through d. of this paragraph, provided by or through
the corporation or any direct or indirect majority-owned subsidiary,
or
f. any share acquisition pursuant to Section 1090.1 of Title 18
of the Oklahoma Statutes;
D-6
<PAGE> 245
(vi) "control", including the terms "controlling", "controlled by"
and "under common control with", means the possession, directly or
indirectly, of the power to direct or cause the direction of the
management and policies of a person, whether through the ownership of
voting stock, by contract, or otherwise. A person who owns, of record or
beneficially, outstanding stock of the corporation having twenty percent
(20%) or more of all voting power of the corporation shall be presumed
to have control of such corporation, in the absence of proof by a
preponderance of the evidence to the contrary. Notwithstanding the
foregoing, a presumption of control shall not apply where such person
holds stock, in good faith and not for the purpose of circumventing this
section, as an agent, bank, broker, nominee, custodian or trustee for
one or more owners who do not individually or as a group have control of
such corporation;
(vii) "group" means two or more persons who agree to act together
for the purpose of acquiring, holding, voting or disposing of securities
of the corporation;
(viii) a. "interested shareholder" means:
(1) any person, other than the Corporation and any direct or
indirect majority-owned subsidiary of the Corporation, that:
(a) owns of record or beneficially outstanding stock of the
Corporation having fifteen percent (15%) or more of all voting
power of the Corporation, or
(b) is an affiliate or associate of the Corporation and
owned of record or beneficially outstanding stock of the
Corporation having fifteen percent (15%) or more of all voting
power of the Corporation at any time within the three-year period
immediately prior to the date on which it is sought to be
determined whether such person is an interested shareholder, and
(2) the affiliates and associates of such person;
b. the term "interested shareholder" shall not include any person
whose ownership of shares in excess of the fifteen percent (15%)
limitation set forth herein is the result of action taken solely by the
Corporation, provided that such person shall be an interested
shareholder if thereafter he acquires additional shares of voting stock
of the Corporation, except as a result of further corporate action not
caused, directly or indirectly, by such person;
c. for the purpose of determining whether a person is an interested
shareholder, the stock of the Corporation deemed to be outstanding shall
include stock owned of record or beneficially by such person, but shall
not include any other unissued stock of the Corporation which may be
issuable pursuant to any agreement, arrangement or understanding, or
upon exercise of conversion rights, warrants or options, or otherwise;
(ix) "person" means any individual, corporation, partnership,
unincorporated association, any other entity, any group and any member
of a group.
TWELFTH. The board of directors shall be divided into three classes as
nearly equal in number as possible with the term of office of one class expiring
each year. Of the directors chosen at the first stockholders' meeting, the term
of office of those of the first class shall expire at the first annual meeting
after their election; the term of office of those of the second class shall
expire at the second annual meeting after their election; and the term of office
of those of the third class shall expire at the third annual meeting after their
election. At each annual meeting held after such classification and election,
directors shall be chosen for a full term of three years to succeed those whose
terms expire. When the number of directors is changed any newly created
directorship or any decrease in directorship shall be so apportioned among the
classes as to make all classes as nearly equal in number as possible. When the
number of directors is increased by the board of directors, there shall be no
classification of the additional directors until the next annual meeting of
stockholders.
D-7
<PAGE> 246
Subject to the rights, if any, of the holders of Preferred Stock to elect
directors, vacancies and newly created directorships resulting from any increase
in the authorized number of directors shall be filled by a majority of the
directors then in office, though less than a quorum, or by a sole remaining
director. The directors so chosen shall hold office until the next annual
election of the class for which each such director has been chosen and until his
successor is duly elected and qualified, or until his earlier resignation or
removal. No decrease in the number of directors constituting the Board of
Directors shall shorten the term of an incumbent director.
THIRTEENTH.
(a) The Corporation shall indemnify any person who was or is a party
or is threatened to be made a party to any threatened, pending or completed
action, suit or proceeding whether civil, criminal, administrative or
investigative (other than an action by or in the right of the Corporation)
by reason of the fact that he is or was a director, officer, employee or
agent of the Corporation or is or was serving at the request of the
Corporation as a director, officer, employee or agent of another
corporation, partnership, joint venture or other enterprise against
expenses (including attorney's fees), judgments, fines and amounts paid in
settlement actually and reasonably incurred by him in connection with such
action, suit or proceeding, if he acted in good faith and in a manner he
reasonably believed to be in or not opposed to the best interest of the
Corporation and, with respect to any criminal action or proceeding, had no
reasonable cause to believe that his conduct was unlawful. The termination
of any action, suit or proceeding by judgment, order, settlement,
conviction or upon a plea of nolo contendere or its equivalent shall not of
itself create a presumption that the person did not act in good faith and
in a manner which he reasonably believed to be in or not opposed to the
best interest of the Corporation and with respect to any criminal action or
proceeding had reasonable cause to believe that his conduct was unlawful.
(b) The Corporation shall indemnify any person who was or is a party
or is threatened to be made a party to any threatened, pending or completed
action or suit by or in the right of the Corporation to procure a judgment
in its favor by reason of the fact that he is or was a director, officer,
employee or agent of the Corporation or is or was serving at the request of
the Corporation as a director, officer, employee or agent of another
Corporation, partnership, joint venture, trust or other enterprise against
expenses (including attorney's fees) actually and reasonably incurred by
him in connection with the defense or settlement of such action or suit, if
he acted in good faith and in a manner he reasonably believed to be in or
not opposed to the best interest of the Corporation; except that no
indemnification shall be made in respect of any claim, issue or matter as
to which such person shall have been adjudged to be liable to the
Corporation unless and only to the extent that the court in which such
action or suit was brought shall determine, upon application, that despite
the adjudication of liability, but in the view of all the circumstances of
the case, such person is fairly and reasonably entitled to indemnity for
such expenses which the court shall deem proper.
(c) Expenses incurred in defending a civil or criminal action, suit or
proceeding may be paid by the Corporation in advance of the final
disposition of such action, suit or proceeding upon receipt of an
undertaking by or on behalf of the director, officer, employee or agent to
repay such amount if it shall ultimately be determined that he is not
entitled to be indemnified by the Corporation as authorized herein.
(d) The Corporation may purchase (upon resolution duly adopted by the
board of directors) and maintain insurance on behalf of any person who is
or was a director, officer, employee or agent of the Corporation, or is or
was serving at the request of the Corporation as a director, officer,
employee or agent of another corporation, partnership, joint venture, trust
or other enterprise against any liability asserted against him and incurred
by him in any such capacity, or arising out of his status as such, whether
or not the Corporation would have the power to indemnify him against such
liability.
(e) To the extent that a director, officer, employee or agent of the
Corporation has been successful on the merits or otherwise in defense of
any action, suit, or proceeding referred to herein or in defense of any
claim, issue or matter therein, he shall be indemnified against expenses
(including attorneys' fees) actually and reasonably incurred by him in
connection therewith.
D-8
<PAGE> 247
(f) Every such person shall be entitled, without demand by him upon
the Corporation or any action by the Corporation, to enforce his right to
such indemnity in an action at law against the Corporation. The right of
indemnification and advancement of expenses hereinabove provided shall not
be deemed exclusive of any rights to which any such person may now or
hereafter be otherwise entitled and specifically, without limiting the
generality of the foregoing, shall not be deemed exclusive of any rights
pursuant to statute or otherwise, of any such person in any such action,
suit or proceeding to have assessed or allowed in his favor against the
Corporation or otherwise, his costs and expenses incurred therein or in
connection therewith or any part thereof.
FOURTEENTH. The provisions of this Article and Articles NINTH through
THIRTEENTH of this Amended and Restated Certificate of Incorporation shall not
be altered, amended or repealed except by the affirmative vote of the holders of
capital stock entitled to cast at least 80% of the votes entitled to be cast
thereon.
IN WITNESS WHEREOF, the Corporation has caused this Amended and Restated
Certificate of Incorporation to be signed by J. Larry Nichols, its President and
Chief Executive Officer, and attested by Marian J. Moon, its Secretary this --
day of -- , 1998.
------------------------------------
J. Larry Nichols,
President and Chief Executive
Officer
ATTEST:
- ------------------------------------------------------
Marian J. Moon,
Corporate Secretary
D-9
<PAGE> 248
ANNEX E
PLAN OF ARRANGEMENT
UNDER SECTION 186
OF THE BUSINESS CORPORATIONS ACT (ALBERTA)
INVOLVING AND AFFECTING NORTHSTAR ENERGY CORPORATION
AND THE HOLDERS OF ITS COMMON SHARES AND OPTIONS
ARTICLE 1
INTERPRETATION
1.1 DEFINITIONS
In this Plan of Arrangement unless there is something in the subject matter
or context inconsistent therewith, the following terms shall have the respective
meanings set out below and grammatical variations of such terms shall have
corresponding meanings:
"ABCA" means the Business Corporations Act (Alberta);
"AMEX" means the American Stock Exchange;
"Arrangement" means the arrangement under section 186 of the ABCA on the
terms and subject to the conditions set out in this Plan of Arrangement, subject
to any amendments thereto made (i) in accordance with Section 8.8 of the
Combination Agreement, (ii) in accordance with Section 6.1 hereof or (iii) at
the direction of the Court in the Final Order;
"Arrangement Resolution" means the special resolution passed by the
Shareholders and the Optionholders at the Meeting;
"Automatic Redemption Date" has the meaning provided in the Exchangeable
Share Provisions;
"Average Closing Price" means the average closing sales price per share
(computed and rounded to the third decimal point) of shares of Devon Common
Stock on the AMEX during the period of 10 consecutive trading days ending on the
last trading day prior to the Effective Date;
"Business Day" has the meaning provided in the Exchangeable Share
Provisions;
"Class A Preferred Share" means the one authorized Class A Preferred Share
of Northstar having the rights, privileges, restrictions and conditions as set
out in Appendix "A" annexed hereto;
"Combination Agreement" means the agreement by and among Devon and
Northstar dated as of June 29, 1998, as amended and restated from time to time,
providing for, among other things, this Plan of Arrangement and the Arrangement;
"Court" means the Court of Queen's Bench of Alberta;
"Depositary" means CIBC Mellon Trust Company at its principal transfer
offices in Calgary, Alberta and Toronto, Ontario;
"Devon" means Devon Energy Corporation, a corporation organized and
existing under the laws of the State of Oklahoma;
"Devon Common Stock" has the meaning provided in the Exchangeable Share
Provisions;
"Dissent Procedures" has the meaning provided in Section 3.1;
"Effective Date" means the date shown on the certificate of arrangement
issued by the Registrar under the ABCA giving effect to the Arrangement;
"Effective Time" means 12:01 a.m. (Calgary Time) on the Effective Date;
"Exchange Put Right" has the meaning provided in the Exchangeable Share
Provisions;
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"Exchange Ratio" means the ratio of 0.227 Exchangeable Shares for each
whole Northstar Common Share, subject to adjustment as provided herein and in
accordance with the Combination Agreement;
"Exchangeable Share Consideration" has the meaning provided in the
Exchangeable Share Provisions;
"Exchangeable Share Price" has the meaning provided in the Exchangeable
Share Provisions;
"Exchangeable Share Provisions" means the rights, privileges, restrictions
and conditions attaching to the Exchangeable Shares, in substantially the form
attached hereto as Appendix "A";
"Exchangeable Shares" means the Exchangeable Shares in the capital of
Northstar;
"Final Order" means the final order of the Court approving the Arrangement,
as such order may be amended by the Court at any time and from time to time
prior to the Effective Time;
"Interim Order" means the interim order of the Court in relation to the
Arrangement, as such order may be amended by the Court at any time and from time
to time;
"Liquidation Call Purchase Price" has the meaning provided in Section 5.1;
"Liquidation Call Right" has the meaning provided in Section 5.1;
"Liquidation Date" has the meaning provided in the Exchangeable Share
Provisions;
"Meeting" means the special meeting of the Shareholders and of the
Optionholders to be held to consider this Plan of Arrangement;
"Northstar" means Northstar Energy Corporation, a corporation organized and
existing under the ABCA;
"Northstar Common Shares" means the common shares in the capital of
Northstar;
"Options" means all options to purchase Northstar Common Shares outstanding
as at the Effective Date, including all options outstanding under Northstar's
stock option plan, options to purchase Northstar Common Shares outstanding under
the converted Morrison Petroleums Ltd. options and under all private stock
option agreements;
"Optionholders" means holders of Options;
"Proxy Statement" means the Joint Management Information Circular and Proxy
Statement of Devon and Northstar prepared in connection with the Arrangement;
"Redemption Call Purchase Price" has the meaning provided in Section 5.2;
"Redemption Call Right" has the meaning provided in Section 5.2;
"Shareholders" means holders of Northstar Common Shares;
"Subsidiary" has the meaning provided in the Exchangeable Share Provisions;
"Transfer Agent" means the duly appointed transfer agent for the time being
of the Exchangeable Shares, and, if there is more than one such transfer agent,
then the principal Canadian transfer agent; and
"Voting and Exchange Trust Agreement" means the agreement so entitled
between Devon, Northstar and the Trustee named therein to be dated as of the
Effective Date and provided for in the Combination Agreement.
1.2 SECTIONS, HEADINGS AND APPENDIXES
The division of this Plan of Arrangement into sections and the insertion of
headings are for reference purposes only and shall not affect the interpretation
of this Plan of Arrangement. Unless otherwise indicated, any reference in this
Plan of Arrangement to a section or an Appendix refers to the specified section
of or Appendix to this Plan of Arrangement. The Appendixes are incorporated
herein and are an integral part hereof.
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1.3 NUMBER, GENDER AND PERSONS
In this Plan of Arrangement, unless the context otherwise requires, words
importing the singular number include the plural and vice versa, words importing
any gender include all genders and words importing persons include individuals,
bodies corporate, partnerships, associations, trusts, unincorporated
organizations, governmental bodies and other legal or business entities of any
kind.
1.4 DATE FOR ANY ACTION
In the event that any date on or by which any action is required or
permitted to be taken hereunder is not a Business Day, such action shall be
required or permitted to be taken on or by the next succeeding day which is a
Business Day.
1.5 CURRENCY
Unless otherwise expressly stated herein, all references to currency and
payments in cash or money in this Plan of Arrangement are to United States
dollars.
1.6 STATUTORY REFERENCES
Any reference in this Plan of Arrangement to a statute includes such
statute as amended, consolidated or re-enacted from time to time, all
regulations made thereunder, all amendments to such regulations from time to
time, and any statute or regulation which supersedes such statute or
regulations.
ARTICLE 2
ARRANGEMENT
2.1 ARRANGEMENT
At the Effective Time, the following reorganization of capital and other
transactions shall occur and shall be deemed to occur in the following order
without any further act or formality:
a. The Articles of Amalgamation of Northstar shall be amended to
create and authorize an unlimited number of Exchangeable Shares.
b. The Articles of Amalgamation of Northstar shall be amended to
create and authorize the Class A Preferred Share, limited to one in number.
c. Northstar shall issue to Devon one Class A Preferred Share in
consideration of the issuance to Northstar of one share of Devon Common
Stock. The stated capital of the Class A Preferred Share shall be equal to
the fair market value, as determined by the board of directors of
Northstar, of a share of Devon Common Stock. No certificate shall be issued
in respect of the Class A Preferred Share.
d. Each of the then outstanding Northstar Common Shares (other than
Northstar Common Shares held by holders who have exercised their rights of
dissent in accordance with Section 3.1 hereof and who are ultimately
entitled to be paid the fair value for such shares and other than Northstar
Common Shares held by Devon or any Subsidiary thereof) will, without
further action on behalf of the holders of such Northstar Common Shares, be
exchanged with Northstar at the Exchange Ratio for a number of Exchangeable
Shares, and each such holder thereof will receive a whole number of
Exchangeable Shares resulting therefrom. If the weighted average trading
price of shares of Devon Common Stock on the American Stock Exchange (the
"AMEX") (as reported by the AMEX and converted, as herein provided, to
Canadian dollars and expressed to the fourth decimal place) during the
period (the "Measurement Period") of 10 consecutive trading days ending on
the second trading day prior to the first to occur of the date of the Devon
Stockholders Meeting (as defined in the Combination Agreement) and the
Northstar Shareholders Meeting (as defined in the Combination Agreement)
(the "Pre-Meeting Average Price") multiplied by 0.227 shall be less than
$11.00 (Canadian) per share of Northstar, the
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Exchange Ratio shall be adjusted to the lesser of: (A) 0.235; or (B) the
number obtained by dividing $11.00 (Canadian) by the Pre-Meeting Average
Price. For the purposes of this adjustment, the Canadian dollar exchange
rate for determining the Pre-Meeting Average Price shall be based upon the
average of the noon buying rate expressed to the fourth decimal place for
each of the trading days in the Measurement Period, as reported by the
Federal Reserve Bank of New York. For this purpose, "weighted average
trading price" shall be determined by dividing the aggregate sale price of
all shares of Devon Common Stock sold on the AMEX during the Measurement
Period by the total number of shares of Devon Common Stock sold. In lieu of
fractional Exchangeable Shares, each such holder who otherwise would be
entitled to receive a fraction of an Exchangeable Share on the exchange
shall be paid by Northstar an amount determined as set forth in Section
4.3.
e. Upon the exchange referred to in subsection (d) above, each such
holder of a Northstar Common Share shall cease to be such a holder, shall
have his name removed from the register of holders of Northstar Common
Shares and shall become a holder of the number of fully paid Exchangeable
Shares to which the holder is entitled as a result of the exchange referred
to in subsection (d), and such holder's name shall be added to the register
of holders of Exchangeable Shares accordingly.
f. The aggregate stated capital of the Exchangeable Shares will be
equal to the aggregate stated capital immediately prior to the Effective
Date of the Northstar Common Shares which are exchanged pursuant to such
subsection 2.1(d) above, thereby excluding the stated capital attributable
to the fractional shares for which payment is made as contemplated in
subsection (d) above.
g. The Articles of Amalgamation of Northstar shall be amended to
provide that the rights, privileges, restrictions and conditions attaching
to the Northstar Common Shares shall be changed and restated as set forth
in Appendix "A".
h. The one outstanding Class A Preferred Share will be exchanged for
one fully-paid and non-assessable Northstar Common Share and the holder
thereof shall cease to be a holder of the Class A Preferred Share, shall
have its name removed from the register of holders of Class A Preferred
Shares and shall become a holder of the Northstar Common Share to which it
is entitled as a result of the exchange referred to in this subsection (h),
and such holder's name shall be added to the register as holder of the
Northstar Common Share accordingly.
i. The stated capital of the one Northstar Common Share shall be equal
to the stated capital of the one Class A Preferred Share immediately prior
to the exchange contemplated in subsection (h).
j. The Articles of Amalgamation of Northstar shall be amended to
delete the Class A Preferred Share, the First Preferred Shares and the
Second Preferred Shares from the authorized share capital so that, after
giving effect to the foregoing provisions of this section 2.1, the
authorized capital of Northstar shall consist of an unlimited number of
Exchangeable Shares having the rights, privileges, restrictions and
conditions set forth in Appendix "A" hereto and an unlimited number of
Common Shares having the rights, privileges, restrictions and conditions
set forth in Appendix "A" hereto.
k. Each of the then outstanding Options (other than Options held by
holders who have exercised their rights of dissent in accordance with
Section 3.1 hereof and who are ultimately entitled to be paid the fair
value for such Options) will, without any further action on the part of any
Optionholder, be converted into an option to purchase the number of shares
of Devon Common Stock determined by multiplying the number of Northstar
Common Shares subject to such Option at the Effective Time by the Exchange
Ratio, at an exercise price per share of Devon Common Stock equal to the
exercise price per share of such Option immediately prior to the Effective
Time divided by the Exchange Ratio, and expressed in U.S. dollars. For the
purposes of determining the exercise price per share of Devon Common Stock,
the exercise price per share of Northstar Common Shares subject to such
Option shall be adjusted using the Canadian dollar exchange rate based upon
the average of the noon buying rate expressed to the fourth decimal place
for each of the trading days in the Measurement Period, as reported by the
Federal Reserve Bank of New York. If the foregoing calculation results in
an exchanged Option being exercisable for a fraction of a share of Devon
Common Stock, then the number of shares of Devon Common Stock subject
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to such Option will be rounded down to the nearest whole number of shares,
and the exercise price per whole share of Devon Common Stock will be as
determined above. The Options as so converted will, without any further
action on the part of the Optionholders, be further modified as necessary
to effect such conversion; provided, however, the term, exercisability,
vesting schedule, and all other terms and conditions of the Options will
otherwise be unchanged by the provisions of this paragraph (k) and shall
operate in accordance with their terms. The obligations of Northstar under
the Northstar Options as so converted shall be assumed by Devon and Devon
shall be substituted for Northstar as the sponsor of the Northstar Option
Plan.
ARTICLE 3
RIGHTS OF DISSENT
3.1 RIGHTS OF DISSENT
Registered Shareholders and Optionholders may exercise rights of dissent
with respect to their Northstar Common Shares or Options pursuant to and in the
manner set forth in section 184 of the ABCA (as modified by the Interim Order)
and this Section 3.1 (the "Dissent Procedures") in connection with the
Arrangement, and holders who duly exercise such rights of dissent and who:
a. are ultimately entitled to be paid fair value for the Northstar
Common Shares or Options shall be deemed to have transferred such Northstar
Common Shares or Options to Northstar for cancellation on the Effective
Date; or
b. are ultimately not entitled, for any reason, to be paid the fair
value for their Northstar Common Shares or Options shall be deemed to have
participated in the Arrangement on the same basis as any non-dissenting
Shareholder or Optionholder, as the case may be,
but in no case shall Northstar be required to recognize such holders as
Shareholders or Optionholders on and after the Effective Date, and the names of
such persons shall be deleted from the registers of Shareholders or
Optionholders on the Effective Date.
ARTICLE 4
CERTIFICATES AND FRACTIONAL SHARES
4.1 ISSUANCE OF CERTIFICATES REPRESENTING EXCHANGEABLE SHARES
At or promptly after the Effective Time, Northstar shall deposit with the
Depositary, for the benefit of the Shareholders who exchanged their Northstar
Common Shares pursuant to the Arrangement, certificates representing the
Exchangeable Shares issued pursuant to the Arrangement upon the exchange. Upon
surrender to the Depositary of a certificate which immediately prior to the
Effective Time represented outstanding Northstar Common Shares, together with
such other documents and instruments as are required to effect the transfer of
the shares formerly represented by such certificate under the ABCA and the
by-laws of Northstar and such additional documents and instruments as the
Depositary may reasonably require, the holder of such surrendered certificate
shall be entitled to receive in exchange therefor, and the Depositary shall
forthwith deliver to such holder, a certificate representing that number
(rounded down to the nearest whole number) of Exchangeable Shares which such
holder has the right to receive pursuant to the Arrangement (together with any
dividends or distributions with respect thereto pursuant to Section 4.2 and any
cash in lieu of fractional Exchangeable Shares pursuant to Section 4.3), and any
certificate so surrendered shall forthwith be canceled. In the event of a
transfer of ownership of Northstar Common Shares which is not registered in the
transfer records of Northstar, a certificate representing the proper number of
Exchangeable Shares (together with any dividends or distributions with respect
thereto pursuant to Section 4.2 and any cash in lieu of fractional Exchangeable
Shares pursuant to Section 4.3) shall be delivered to a transferee if the
certificate representing such Northstar Common Shares is presented to the
Depositary, accompanied by all documents
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required to evidence and effect such transfer. Until surrendered as contemplated
by this Section 4.1, each certificate which immediately prior to the Effective
Time represented outstanding Northstar Common Shares shall be deemed at any time
after the Effective Time, but subject to Section 4.5, to represent only the
right to receive upon such surrender (a) the certificate representing
Exchangeable Shares as contemplated by this Section 4.1, (b) a cash payment in
lieu of any fractional Exchangeable Shares as contemplated by Section 4.3 and
(c) any dividends or distributions with a record date after the Effective Time
theretofore paid or payable with respect to Exchangeable Shares as contemplated
by Section 4.2.
4.2 DIVIDENDS AND OTHER DISTRIBUTIONS
No dividends or other distributions declared or made after the Effective
Time with respect to the Exchangeable Shares with a record date after the
Effective Time shall be paid to the holder of any formerly outstanding Northstar
Common Shares which were not exchanged pursuant to Section 2.1, and no cash
payment in lieu of fractional shares shall be paid to any such holder pursuant
to Section 4.3 (and no interest will be earned and payable thereon), unless and
until the certificate representing such Northstar Common Shares shall be
surrendered in accordance with Section 4.1. Subject to applicable law and to
Section 4.5, at the time of such surrender of any such certificate (or, in the
case of clause (c) below, at the appropriate payment date), there shall be paid
to the holder of the Exchangeable Shares resulting from such exchange, in all
cases without interest, (a) the amount of any cash payable in lieu of a
fractional Exchangeable Share to which such holder is entitled pursuant to
Section 4.3, (b) the amount of dividends or other distributions with a record
date after the Effective Time theretofore paid with respect to such Exchangeable
Shares, and (c) the amount of dividends or other distributions with a record
date after the Effective Time but prior to surrender and a payment date
subsequent to surrender payable with respect to such Exchangeable Shares.
4.3 NO FRACTIONAL SHARES
No certificates or scrip representing fractional Exchangeable Shares shall
be issued upon the surrender for exchange of certificates pursuant to Section
4.1, and such fractional interests shall not entitle the owner thereof to vote
or to possess or exercise any rights as a security holder of Northstar. In lieu
of any such fractional interests, each person entitled thereto will receive an
amount of cash (rounded to the nearest whole cent), without interest, equal to
the product of (a) such fractional interest, multiplied by (b) the Average
Closing Price, such amount to be provided to the Depositary by Northstar upon
request.
4.4 LOST CERTIFICATES
If any certificate which immediately prior to the Effective Time
represented outstanding Northstar Common Shares which were exchanged pursuant to
Section 2.1 has been lost, stolen or destroyed, upon the making of an affidavit
of that fact by the person claiming such certificate to be lost, stolen or
destroyed, the Depositary will issue in exchange for such lost, stolen or
destroyed certificate, certificates representing Exchangeable Shares (together
with any dividends or distributions with respect thereto pursuant to Section 4.2
and any cash in lieu of fractional Exchangeable Shares pursuant to Section 4.3)
deliverable in respect thereof as determined in accordance with Section 2.1.
When seeking such certificate and payment in exchange for any lost, stolen or
destroyed certificate, the person to whom certificates representing Exchangeable
Shares are to be issued shall, as a condition precedent to the issuance thereof,
give a bond satisfactory to Northstar, Devon and the Transfer Agent, as the case
may be, in such sum as Northstar may direct or otherwise indemnify Northstar,
Devon and the Transfer Agent in a manner satisfactory to Northstar, Devon and
the Transfer Agent against any claim that may be made against Northstar, Devon
or the Transfer Agent with respect to the certificate alleged to have been lost,
stolen or destroyed.
4.5 EXTINGUISHMENT OF RIGHTS
Any certificate which immediately prior to the Effective Time represented
outstanding Northstar Common Shares which were exchanged pursuant to Section 2.1
and has not been deposited, with all other instruments required by Section 4.1,
on or prior to the tenth anniversary of the Effective Date shall cease to
represent a claim or interest of any kind or nature as a Shareholder or a holder
of Exchangeable Shares or
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shares of Devon Common Stock. On such date, the Exchangeable Shares (and any
dividends or distributions with respect thereto and any cash pursuant to Section
4.3) to which the former registered holder of the certificate referred to in the
preceding sentence was ultimately entitled (or, if the Automatic Redemption Date
has occurred, the resulting shares of Devon Common Stock) shall be deemed to
have been surrendered to Northstar (or, in the event that the Automatic
Redemption Date has occurred, Devon), together with all entitlements to
dividends, distributions, cash and interest thereon held for such former
registered holder, for no consideration and such shares shall thereupon be
canceled and the name of the former registered holder shall be removed from the
register of holders of such shares.
ARTICLE 5
CERTAIN RIGHTS AND OBLIGATIONS OF DEVON TO ACQUIRE
EXCHANGEABLE SHARES
5.1 DEVON LIQUIDATION CALL RIGHT
a. Devon shall have the overriding right (the "Liquidation Call Right"), in
the event of and notwithstanding the proposed liquidation, dissolution or
winding-up of Northstar as referred to in Article 5 of the Exchangeable Share
Provisions, to purchase from all but not less than all of the holders (other
than Devon or any Subsidiary thereof) of Exchangeable Shares on the Liquidation
Date all but not less than all of the Exchangeable Shares held by such holders
on payment by Devon to each holder of the Exchangeable Share Price applicable on
the last Business Day prior to the Liquidation Date (the "Liquidation Call
Purchase Price") in accordance with subsection 5.1(c). In the event of the
exercise of the Liquidation Call Right by Devon, each holder shall be obligated
to sell all the Exchangeable Shares held by such holder to Devon on the
Liquidation Date on payment by Devon to the holder of the Liquidation Call
Purchase Price for each such share.
b. To exercise the Liquidation Call Right, Devon must notify Northstar's
Transfer Agent in writing, as agent for the holders of Exchangeable Shares, and
Northstar of Devon's intention to exercise such right at least 55 days before
the Liquidation Date in the case of a voluntary liquidation, dissolution or
winding-up of Northstar and at least five Business Days before the Liquidation
Date in the case of an involuntary liquidation, dissolution or winding-up of
Northstar. The Transfer Agent will notify the holders of Exchangeable Shares as
to whether or not Devon has exercised the Liquidation Call Right forthwith after
the expiry of the date by which the same may be exercised by Devon. If Devon
exercises the Liquidation Call Right, on the Liquidation Date, Devon will
purchase and the holders will sell all of the Exchangeable Shares then
outstanding for a price per share equal to the Liquidation Call Purchase Price.
c. For the purposes of completing the purchase of the Exchangeable Shares
pursuant to the Liquidation Call Right, Devon shall deposit with the Transfer
Agent, on or before the Liquidation Date, the Exchangeable Share Consideration
representing the total Liquidation Call Purchase Price. Provided that such
Exchangeable Share Consideration has been so deposited with the Transfer Agent,
on and after the Liquidation Date, the right of each holder of Exchangeable
Shares will be limited to receiving such holder's proportionate part of the
total Liquidation Call Purchase Price payable by Devon, without interest, upon
presentation and surrender by the holder of certificates representing the
Exchangeable Shares held by such holder and the holder shall, on and after the
Liquidation Date, be considered and deemed for all purposes to be the holder of
the Devon Common Stock delivered to such holder. Upon surrender to the Transfer
Agent of a certificate or certificates representing Exchangeable Shares,
together with such other documents and instruments as may be required to effect
a transfer of Exchangeable Shares under the ABCA and the by-laws of Northstar
and such additional documents and instruments as the Transfer Agent may
reasonably require, the holder of such surrendered certificate or certificates
shall be entitled to receive in exchange therefor, and the Transfer Agent on
behalf of Devon shall deliver to such holder, the Exchangeable Share
Consideration to which such holder is entitled. If Devon does not exercise the
Liquidation Call Right in the manner described above, on the Liquidation Date,
the holders of the Exchangeable Shares will be entitled to receive in exchange
therefor the liquidation price otherwise payable by Northstar in connection with
the liquidation, dissolution or winding-up of Northstar
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pursuant to Article 5 of the Exchangeable Share Provisions. Notwithstanding the
foregoing, until such Exchangeable Share Consideration is delivered to the
holder, the holder shall be deemed to still be a holder of Exchangeable Shares
for purposes of all voting rights with respect thereto under the Voting and
Exchange Trust Agreement.
5.2 DEVON REDEMPTION CALL RIGHT
a. Devon shall have the overriding right (the "Redemption Call Right"),
notwithstanding the proposed redemption of the Exchangeable Shares by Northstar
pursuant to Article 7 of the Exchangeable Share Provisions, to purchase from all
but not less than all of the holders (other than Devon or any Subsidiary
thereof) of Exchangeable Shares on the Automatic Redemption Date all but not
less than all of the Exchangeable Shares held by each such holder on payment by
Devon to the holder of the Exchangeable Share Price applicable on the last
Business Day prior to the Automatic Redemption Date (the "Redemption Call
Purchase Price") in accordance with subsection 5.2(c). In the event of the
exercise of the Redemption Call Right by Devon, each holder shall be obligated
to sell all the Exchangeable Shares held by the holder to Devon on the Automatic
Redemption Date on payment by Devon to the holder of the Redemption Call
Purchase Price for each such share.
b. To exercise the Redemption Call Right, Devon must notify the Transfer
Agent in writing, as agent for the holders of Exchangeable Shares, and Northstar
of Devon's intention to exercise such right not later than the date by which
Northstar is required to give notice of the Automatic Redemption Date. The
Transfer Agent will notify the holders of the Exchangeable Shares as to whether
or not Devon has exercised the Redemption Call Right forthwith after the date by
which the same may be exercised by Devon. If Devon exercises the Redemption Call
Right, on the Automatic Redemption Date, Devon will purchase and the holders
will sell all of the Exchangeable Shares then outstanding for a price per share
equal to the Redemption Call Purchase Price.
c. For the purposes of completing the purchase of the Exchangeable Shares
pursuant to the Redemption Call Right, Devon shall deposit with the Transfer
Agent, on or before the Automatic Redemption Date, the Exchangeable Share
Consideration representing the total Redemption Call Purchase Price. Provided
that such Exchangeable Share Consideration has been so deposited with the
Transfer Agent, on and after the Automatic Redemption Date, the rights of each
holder of Exchangeable Shares will be limited to receiving such holder's
proportionate part of the total Redemption Call Purchase Price payable by Devon
upon presentation and surrender by the holder of certificates representing the
Exchangeable Shares held by such holder and the holder shall on and after the
Automatic Redemption Date be considered and deemed for all purposes to be the
holder of the Devon Common Stock delivered to such holder. Upon surrender to the
Transfer Agent of a certificate or certificates representing Exchangeable
Shares, together with such other documents and instruments as may be required to
effect a transfer of Exchangeable Shares under the ABCA and the by-laws of
Northstar and such additional documents and instruments as the Transfer Agent
may reasonably require, the holder of such surrendered certificate or
certificates shall be entitled to receive in exchange therefor, and the Transfer
Agent on behalf of Devon shall deliver to such holder, the Exchangeable Share
Consideration to which such holder is entitled. If Devon does not exercise the
Redemption Call Right in the manner described above, on the Automatic Redemption
Date, the holders of the Exchangeable Shares will be entitled to receive in
exchange therefor the redemption price otherwise payable by Northstar in
connection with the redemption of the Exchangeable Shares pursuant to Article 7
of the Exchangeable Share Provisions. Notwithstanding the foregoing, until such
Exchangeable Share Consideration is delivered to the holder, the holder shall be
deemed to still be a holder of Exchangeable Shares for purposes of all voting
rights with respect thereto under the Voting and Exchange Trust Agreement.
5.3 EXCHANGE PUT RIGHT
Upon and subject to the terms and conditions contained in the Exchangeable
Share Provisions and the Voting and Exchange Trust Agreement, a holder of
Exchangeable Shares shall have the Exchange Put Right.
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ARTICLE 6
AMENDMENT
6.1 PLAN OF ARRANGEMENT AMENDMENT
Northstar reserves the right to amend, modify and/or supplement this Plan
of Arrangement at any time and from time to time provided that any such
amendment, modification or supplement must be contained in a written document
that is (a) agreed to by Devon, (b) filed with the Court and, if made following
the Meeting, approved by the Court and (c) communicated to Shareholders and
Optionholders in the manner required by the Court (if so required).
Any amendment, modification or supplement to this Plan of Arrangement may
be proposed by Northstar at any time prior to or at the Meeting (provided that
Devon shall have consented thereto) with or without any other prior notice or
communication, and if so proposed and accepted by the persons voting at the
Meeting (other than as may be required under the Interim Order), shall become
part of this Plan of Arrangement for all purposes.
Any amendment, modification or supplement to this Plan of Arrangement which
is approved by the Court following the Meeting shall be effective only (a) if it
is consented to by Northstar, (b) if it is consented to by Devon and (c) if
required by the Court or applicable law, it is consented to by the Shareholders,
Optionholders or the holders of Exchangeable Shares, as the case may be.
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APPENDIX "A"
PROVISIONS ATTACHING TO THE CLASS A PREFERRED SHARE
The Class A Preferred Share in the capital of the Corporation shall have
attached thereto the following rights, privileges, restrictions and conditions:
DIVIDENDS
Subject to the prior rights of the holders of any shares ranking senior to
the Class A Preferred Share with respect to priority in the payment of
dividends, the holder of the Class A Preferred Share shall be entitled to
receive dividends and the Corporation shall pay dividends thereon, as and when
declared by the board of directors of the Corporation.
DISSOLUTION
In the event of the liquidation, dissolution or winding-up of the
Corporation, whether voluntary or involuntary, or any other distribution of
assets of the Corporation among its shareholders for the purpose of winding-up
its affairs, subject to the prior rights of the holders of any shares ranking
senior to the Class A Preferred Share with respect to priority in the
distribution of assets upon liquidation, dissolution or winding-up, the holder
of the Class A Preferred Share shall be entitled to receive an amount equal to
the stated capital in respect of the Class A Preferred Share and dividends
remaining unpaid, including all cumulative dividends, whether or not declared.
After payment to the holder of the Class A Preferred Share of such amounts, such
holder shall not be entitled to share in any further distribution of the assets
of the Corporation.
VOTING RIGHTS
Except where specifically provided in the Business Corporations Act
(Alberta), the holder of the Class A Preferred Share shall not be entitled to
receive notice of or to attend meetings of the shareholders of the Corporation
and shall not be entitled to vote at any meeting of shareholders of the
Corporation.
PROVISIONS ATTACHING TO THE COMMON SHARES
The common shares ("Common Shares") in the capital of the Corporation shall
have attached thereto the following rights, privileges, restrictions and
conditions:
DIVIDENDS
Subject to the prior rights of the Exchangeable Shares and any other shares
ranking prior to the Common Shares, holders of Common Shares have a right to
receive dividends when declared by the Board of Directors out of property of the
Corporation legally available therefor.
LIQUIDATION
Subject to the prior rights of the Exchangeable Shares and any other shares
ranking prior to the Common Shares, the holders of Common Shares shall, upon any
liquidation, dissolution or winding-up of the Corporation, whether voluntary or
involuntary, or other distribution of the assets of the Corporation for the
purpose of winding-up its affairs, be entitled to receive the remaining property
and assets of the Corporation.
VOTING
The holders of the Common Shares shall be entitled to receive notice of and
to attend all meetings of shareholders (other than separate meetings of other
classes or series of shares), and shall be entitled to one vote for each Common
Share held.
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PROVISIONS ATTACHING TO THE EXCHANGEABLE SHARES
The Exchangeable Shares in the capital of the Corporation shall have the
following rights, privileges, restrictions and conditions:
ARTICLE 1
INTERPRETATION
1.1 For the purposes of these rights, privileges, restrictions and
conditions:
"Act" means the Business Corporations Act (Alberta), as amended,
consolidated or reenacted from time to time.
"Aggregate Equivalent Vote Amount" means, with respect to any matter,
proposition or question on which holders of Devon Common Stock are entitled to
vote, consent or otherwise act, the product of (i) the number of Exchangeable
Shares then issued and outstanding and held by holders (other than Devon and its
Subsidiaries) multiplied by (ii) the number of votes to which a holder of one
share of Devon Common Stock is entitled with respect to such matter, proposition
or question.
"Automatic Redemption Date" means the date for the automatic redemption by
the Corporation of Exchangeable Shares pursuant to Article 7 of these share
provisions, which date shall be the first to occur of (a) the 10th anniversary
of the Effective Date of the Arrangement, (b) the date selected by the Board of
Directors of the Corporation (such date to be no earlier than the third
anniversary of the Effective Date of the Arrangement) at a time when less than
5% of the number of Exchangeable Shares issuable on the Effective Date (other
than Exchangeable Shares held by Devon and its Subsidiaries, and as such number
of shares may be adjusted as deemed appropriate by the Board of Directors to
give effect to any subdivision or consolidation of or stock dividend on the
Exchangeable Shares, any issuance or distribution of rights to acquire
Exchangeable Shares or securities exchangeable for or convertible into or
carrying rights to acquire Exchangeable Shares, any issue or distribution of
other securities or rights or evidences of indebtedness or assets, or any other
capital reorganization or other transaction involving or affecting the
Exchangeable Shares) are outstanding, (c) the Business Day prior to the record
date for any meeting or vote of the shareholders of the Corporation to consider
any matter on which the holders of Exchangeable Shares would be entitled to vote
as shareholders of the Corporation, but excluding any meeting or vote as
described in clause (d) below, (d) the Business Day following the day on which
the holders of Exchangeable Shares fail to take the necessary action at a
meeting or other vote of holders of Exchangeable Shares, if and to the extent
such action is required, to approve or disapprove, as applicable, any change to,
or in the rights of the holders of, Exchangeable Shares, if the approval or
disapproval, as applicable, of such change would be required to maintain the
economic and legal equivalence of the Exchangeable Shares and the Devon Common
Stock or (e) the date on which the share purchase rights issued pursuant to the
Rights Agreement, dated as of April 17, 1995, as amended, between Devon and
First National Bank of Boston (or pursuant to any similar successor or
replacement rights agreement) would separate from the shares of Devon Common
Stock and become exercisable.
"Board of Directors" means the board of directors of the Corporation and
any committee thereof acting within its authority.
"Business Day" means any day other than a Saturday, a Sunday or a day when
banks are not open for business in either or both of Oklahoma City, Oklahoma and
Calgary, Alberta.
"Common Shares" means the common shares in the capital of the Corporation.
"Corporation" means Northstar Energy Corporation, a corporation organized
and existing under the Act and includes any successor corporation.
"Current Market Price" means, in respect of a share of Devon Common Stock
on any date, the average of the closing sale prices per share (computed and
rounded to the third decimal point) of shares of Devon Common Stock during the
period of 20 consecutive trading days ending not more than five trading days
before
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such date on the American Stock Exchange, or, if Devon Common Stock is not then
traded on the American Stock Exchange, on such other principal U.S. stock
exchange or automated quotation system on which the Devon Common Stock is listed
or quoted, as the case may be, as may be selected by the Board of Directors for
such purpose; provided, however, that if, in the opinion of the Board of
Directors the public distribution or trading activity of Devon Common Stock
during such period does not create a market which reflects the fair market value
of a share of Devon Common Stock, then the Current Market Price of a share of
Devon Common Stock shall be determined by the Board of Directors based upon the
advice of such qualified independent financial advisors as the Board of
Directors may deem to be appropriate, and provided further than any such
selection, opinion or determination by the Board of Directors shall be
conclusive and binding.
"Devon" means Devon Energy Corporation, a corporation organized and
existing under the laws of the State of Oklahoma and includes any successor
corporation.
"Devon Call Notice" has the meaning provided in Section 6.3.
"Devon Common Stock" means the shares of common stock of Devon, with a par
value of U.S. $0.10 per share, having voting rights of one vote per share, and
any other securities resulting from the application of Section 2.7 of the
Support Agreement.
"Devon Dividend Declaration Date" means the date on which the board of
directors of Devon declares any dividend on the Devon Common Stock.
"Devon Special Share" means the one share of Special Voting Stock of Devon,
with a par value of U.S. $0.10, and having voting rights at meetings of holders
of Devon Common Stock equal to the Aggregate Equivalent Voting Amount.
"Exchange Put Date" has the meaning provided in Section 8.2.
"Exchange Put Right" has the meaning provided in Section 8.1.
"Exchangeable Share Consideration" means, for any acquisition of or
redemption of or distribution of assets of the Corporation in respect of or
purchase pursuant to these share provisions, the Plan of Arrangement, the
Support Agreement or the Voting and Exchange Trust Agreement:
a. certificates representing the aggregate number of shares of Devon
Common Stock deliverable in connection with such action;
b. a cheque or cheques payable at par at any branch of the bankers of
the payor in the amount of all declared, payable and unpaid, and all
undeclared but payable, cash dividends deliverable in connection with such
action; and
c. such stock or other property constituting any declared and unpaid,
and all undeclared but payable, non-cash dividends deliverable in
connection with such action,
provided that (i) that part of the consideration which represents (a) above,
shall be fully paid and satisfied by the delivery of one share of Devon Common
Stock for each one Exchangeable Share, such share to be duly issued as a fully
paid and non-assessable share, (ii) that part of the consideration which
represents (c), above, unpaid shall be fully paid and satisfied by delivery of
such non-cash items, and (iii) any such consideration shall be delivered free
and clear of any lien, claim, encumbrance, security interest or adverse claim or
interest less any tax required to be deducted and withheld therefrom and without
interest.
"Exchangeable Share Price" means, for each Exchangeable Share, an amount
equal to the aggregate of:
a. the Current Market Price of a share of Devon Common Stock; plus
b. an additional amount equal to the full amount of all cash dividends
declared, payable and unpaid on such Exchangeable Share; plus
c. an additional amount equal to all dividends declared and payable on
Devon Common Stock which have not been declared on Exchangeable Shares in
accordance herewith; plus
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d. an additional amount representing non-cash dividends declared,
payable and unpaid on such Exchangeable Share.
"Exchangeable Shares" means the Exchangeable Shares of the Corporation
having the rights, privileges, restrictions and conditions set forth herein.
"Liquidation Amount" has the meaning provided in Section 5.1.
"Liquidation Call Right" has the meaning provided in the Plan of
Arrangement.
"Liquidation Date" has the meaning provided in Section 5.1.
"Plan of Arrangement" means the plan of arrangement involving and affecting
the Corporation, Devon and the holders of common shares and options of the
Corporation under section 186 of the Act contemplated in the Combination
Agreement by and among Devon and the Corporation, dated as of June 29, 1998, as
amended and restated from time to time.
"Purchase Price" has the meaning provided in Section 6.3.
"Redemption Call Purchase Price" has the meaning provided in the Plan of
Arrangement.
"Redemption Call Right" has the meaning provided in the Plan of
Arrangement.
"Redemption Price" has the meaning provided in Section 7.1.
"Retracted Shares" has the meaning provided in subsection 6.1(a).
"Retraction Call Right" has the meaning provided in subsection 6.1(c).
"Retraction Date" has the meaning provided in subsection 6.1(b).
"Retraction Price" has the meaning provided in Section 6.1.
"Retraction Request" has the meaning provided in Section 6.1.
"Subsidiary", in relation to any person, means any body corporate,
partnership, joint venture, association or other entity of which more than 50%
of the total voting power of shares of stock or units of ownership or beneficial
interest entitled to vote in the election of directors (or members of a
comparable governing body) is owned or controlled, directly or indirectly, by
such person.
"Support Agreement" means the Support Agreement between Devon and the
Corporation, made as of -- , 1998.
"Transfer Agent" means the duly appointed transfer agent for the time being
of the Exchangeable Shares, and, if there is more than one such transfer agent,
then the principal Canadian transfer agent.
"Trustee" means the Trustee appointed under the Voting and Exchange Trust
Agreement, and any successor trustee.
"Voting and Exchange Trust Agreement" means the Voting and Exchange Trust
Agreement among the Corporation, Devon and the Trustee, made as of -- , 1998.
ARTICLE 2
RANKING OF EXCHANGEABLE SHARES
2.1 The Exchangeable Shares shall be entitled to a preference over the
Common Shares and any other shares ranking junior to the Exchangeable Shares,
with respect to the payment of dividends and the distribution of assets in the
event of the liquidation, dissolution or winding-up of the Corporation, whether
voluntary or involuntary, or any other distribution of the assets of the
Corporation among its shareholders for the purpose of winding-up its affairs.
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ARTICLE 3
DIVIDENDS
3.1 A holder of an Exchangeable Share shall be entitled to receive and the
Board of Directors shall, subject to applicable law, on each Devon Dividend
Declaration Date, declare a dividend on each Exchangeable Share (a) in the case
of a cash dividend declared on the Devon Common Stock, in an amount in cash for
each Exchangeable Share equal to the cash dividend declared on each share of
Devon Common Stock, (b) in the case of a stock dividend declared on the Devon
Common Stock to be paid in Devon Common Stock, in such number of Exchangeable
Shares for each Exchangeable Share as is equal to the number of shares of Devon
Common Stock to be paid on each share of Devon Common Stock, (c) in the case of
a dividend declared on the Devon Common Stock in property other than cash or
securities of Devon, in such type and amount of property for each Exchangeable
Share as is the same as the type and amount of property declared as a dividend
on each share of Devon Common Stock or (d) in the case of a dividend declared on
the Devon Common Stock to be paid in securities of Devon other than Devon Common
Stock, in such number of either such securities or economically equivalent
securities of the Corporation, as the Board of Directors determines, for each
Exchangeable Share as is equal to the number of securities of Devon to be paid
on each share of Devon Common Stock. Such dividends shall be paid out of money,
assets or property of the Corporation properly applicable to the payment of
dividends, or out of authorized but unissued shares of the Corporation.
3.2 Cheques of the Corporation payable at par at any branch of the bankers
of the Corporation shall be issued in respect of any cash dividends contemplated
by subsection 3.1(a) hereof and the sending of such a cheque to each holder of
an Exchangeable Share (less any tax required to be deducted and withheld from
such dividends paid or credited by the Corporation) shall satisfy the cash
dividends represented thereby unless the cheque is not paid on presentation.
Certificates registered in the name of the registered holder of Exchangeable
Shares shall be issued or transferred in respect of any stock dividends
contemplated by subsections 3.1(b) or (d) hereof and the sending of such a
certificate to each holder of an Exchangeable Share shall satisfy the stock
dividend represented thereby or dividend payable in other securities represented
thereby. Such other type and amount of property in respect of any dividends
contemplated by subsection 3.1(c) hereof shall be issued, distributed or
transferred by the Corporation in such manner as it shall determine and the
issuance, distribution or transfer thereof by the Corporation to each holder of
an Exchangeable Share shall satisfy the dividend represented thereby. In all
cases, any such dividends shall be subject to any reduction or adjustment for
tax required to be deducted and withheld from such dividends paid or credited by
the Corporation. No holder of an Exchangeable Share shall be entitled to recover
by action or other legal process against the Corporation any dividend which is
represented by a cheque that has not been duly presented to the Corporation's
bankers for payment or which otherwise remains unclaimed for a period of six
years from the date on which such dividend was payable.
3.3 The record date for the determination of the holders of Exchangeable
Shares entitled to receive payment of, and the payment date for, any dividend
declared on the Exchangeable Shares under Section 3.1 hereof shall be the same
dates as the record date and payment date, respectively, for the corresponding
dividend declared on the Devon Common Stock.
3.4 If on any payment date for any dividends declared on the Exchangeable
Shares under Section 3.1 hereof the dividends are not paid in full on all of the
Exchangeable Shares then outstanding, any such dividends which remain unpaid
shall be paid on a subsequent date or dates determined by the Board of Directors
on which the Corporation shall have sufficient moneys, assets or property
properly applicable to the payment of such dividends.
3.5 Except as provided in this Article 3, the holders of Exchangeable
Shares shall not be entitled to receive dividends in respect thereof.
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ARTICLE 4
CERTAIN RESTRICTIONS
4.1 So long as any of the Exchangeable Shares are outstanding, the
Corporation shall not at any time without, but may at any time with, the
approval of the holders of the Exchangeable Shares given as specified in Article
10 of these share provisions:
a. pay any dividends on the Common Shares, or any other shares ranking
junior to the Exchangeable Shares, other than stock dividends payable in
any such other shares ranking junior to the Exchangeable Shares;
b. redeem or purchase or make any capital distribution in respect of
Common Shares or any other shares ranking junior to the Exchangeable Shares
with respect to the payment of dividends or on any liquidation
distribution;
c. redeem or purchase any other shares of the Corporation ranking
equally with the Exchangeable Shares with respect of the payment of
dividends or on any liquidation distribution; or
d. amend the articles or by-laws of the Corporation, in either case in
any manner that would affect the rights or privileges of the holders of the
Exchangeable Shares.
The restrictions in subsections 4.1(a), 4.1(b) and 4.1(c) above shall not
apply if all dividends on the outstanding Exchangeable Shares corresponding to
dividends declared with a record date on or following the effective date of the
Plan of Arrangement on the Devon Common Stock shall have been declared on the
Exchangeable Shares and paid in full. Nothing herein shall be interpreted to
restrict the Corporation from issuing additional Common Shares.
ARTICLE 5
DISTRIBUTION ON LIQUIDATION
5.1 In the event of the liquidation, dissolution or winding-up of the
Corporation or any other distribution of the assets of the Corporation among its
shareholders for the purpose of winding-up its affairs, a holder of Exchangeable
Shares shall be entitled, subject to applicable law, to receive from the assets
of the Corporation in respect of each Exchangeable Share held by such holder on
the effective date of such liquidation, dissolution or winding-up (the
"Liquidation Date"), before any distribution of any part of the assets of the
Corporation to the holders of the Common Shares or any other shares ranking
junior to the Exchangeable Shares, an amount equal to the Exchangeable Share
Price applicable on the last Business Day prior to the Liquidation Date (the
"Liquidation Amount") in accordance with Section 5.2. In connection with payment
of the Liquidation Amount, the Corporation shall be entitled to liquidate some
of the Devon Common Stock which would otherwise be deliverable as Exchangeable
Share Consideration to the particular holder of Exchangeable Shares in order to
fund any statutory withholding tax obligation.
5.2 On or promptly after the Liquidation Date, and subject to the exercise
by Devon of the Liquidation Call Right, the Corporation shall cause to be
delivered to the holders of the Exchangeable Shares the Liquidation Amount for
each such Exchangeable Share upon presentation and surrender of the certificates
representing such Exchangeable Shares, together with such other documents and
instruments as may be required to effect a transfer of Exchangeable Shares under
applicable law and the by-laws of the Corporation and such additional documents
and instruments as the Transfer Agent may reasonably require, at the registered
office of the Corporation or at any office of the Transfer Agent as may be
specified by the Corporation in Schedule A hereto or by notice to the holders of
the Exchangeable Shares. Payment of the total Liquidation Amount for such
Exchangeable Shares shall be made by delivery to each holder, at the address of
the holder recorded in the securities register of the Corporation for the
Exchangeable Shares or by holding for pick up by the holder at the registered
office of the Corporation or at any office of the Transfer Agent as may be
specified by the Corporation in Schedule A hereto or by notice to the holders of
Exchangeable Shares, on behalf of the Corporation of the Exchangeable Share
Consideration representing the
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total Liquidation Amount. On and after the Liquidation Date, the holders of the
Exchangeable Shares shall cease to be holders of such Exchangeable Shares and
shall not be entitled to exercise any of the rights of holders in respect
thereof, other than the right to receive their proportionate part of the total
Liquidation Amount, unless payment of the total Liquidation Amount for such
Exchangeable Shares shall not be made upon presentation and surrender of share
certificates in accordance with the foregoing provisions, in which case the
rights of the holders shall remain unaffected until the total Liquidation Amount
has been paid in the manner hereinbefore provided. The Corporation shall have
the right at any time on or after the Liquidation Date to deposit or cause to be
deposited the Exchangeable Share Consideration in respect of the Exchangeable
Shares represented by certificates that have not at the Liquidation Date been
surrendered by the holders thereof in a custodial account or for safe keeping,
in the case of non-cash items, with any chartered bank or trust company in
Canada. Upon such deposit being made, the rights of the holders of Exchangeable
Shares after such deposit shall be limited to receiving their proportionate part
of the total Liquidation Amount for such Exchangeable Shares so deposited,
against presentation and surrender of the said certificates held by them,
respectively, in accordance with the foregoing provisions. Upon such payment or
deposit of such Exchangeable Share Consideration, the holders of the
Exchangeable Shares shall thereafter be considered and deemed for all purposes
to be the holders of the Devon Common Stock delivered to them. Notwithstanding
the foregoing, until such payment or deposit of such Exchangeable Share
Consideration, the holder shall be deemed to still be a holder of Exchangeable
Shares for purposes of all voting rights with respect thereto under the Voting
and Exchange Trust Agreement.
5.3 After the Corporation has satisfied its obligations to pay the holders
of the Exchangeable Shares the Liquidation Amount per Exchangeable Share, such
holders shall not be entitled to share in any further distribution of the assets
of the Corporation.
ARTICLE 6
RETRACTION OF EXCHANGEABLE SHARES BY HOLDER
6.1 A holder of Exchangeable Shares shall be entitled at any time, subject
to the exercise by Devon of the Retraction Call Right and otherwise upon
compliance with the provisions of this Article 6, to require the Corporation to
redeem any or all of the Exchangeable Shares registered in the name of such
holder for an amount equal to the Exchangeable Share Price applicable on the
last Business Day prior to the Retraction Date (the "Retraction Price") in
accordance with Section 6.4. In connection with payment of the Retraction Price,
the Corporation shall be entitled to liquidate some of the Devon Common Stock
that would otherwise be deliverable as Exchangeable Share Consideration to the
particular holder of Exchangeable Shares in order to fund any statutory
withholding tax obligation. To effect such redemption, the holder shall present
and surrender at the registered office of the Corporation or at any office of
the Transfer Agent as may be specified by the Corporation in Schedule A hereto
or by notice to the holders of Exchangeable Shares the certificate or
certificates representing the Exchangeable Shares which the holder desires to
have the Corporation redeem, together with such other documents and instruments
as may be required to effect a transfer of Exchangeable Shares under applicable
law and the by-laws of the Corporation and such additional documents and
instruments as the Transfer Agent may reasonably require, and together with a
duly executed statement (the "Retraction Request") in the form of Schedule "A"
hereto or in such other form as may be acceptable to the Corporation:
a. specifying that the holder desires to have all or any number
specified therein of the Exchangeable Shares represented by such
certificate or certificates (the "Retracted Shares") redeemed by the
Corporation;
b. stating the Business Day on which the holder desires to have the
Corporation redeem the Retracted Shares (the "Retraction Date"), provided
that the Retraction Date shall be not less than five Business Days nor more
than 10 Business Days after the date on which the Retraction Request is
received by the Corporation and further provided that, in the event that no
such Business Day is specified by the holder in the Retraction Request, the
Retraction Date shall be deemed to be the tenth Business Day after the date
on which the Retraction Request is received by the Corporation; and
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c. acknowledging the overriding right (the "Retraction Call Right") of
Devon to purchase all but not less than all the Retracted Shares directly
from the holder and that the Retraction Request shall be deemed to be a
revocable offer by the holder to sell the Retracted Shares in accordance
with the Retraction Call Right on the terms and conditions set out in
Section 6.3 below.
6.2 Subject to the exercise by Devon of the Retraction Call Right, upon
receipt by the Corporation or the Transfer Agent in the manner specified in
Section 6.1 hereof of a certificate or certificates representing the number of
Exchangeable Shares which the holder desires to have the Corporation redeem,
together with a Retraction Request, and provided that the Retraction Request is
not revoked by the holder in the manner specified in Section 6.7, the
Corporation shall redeem the Retracted Shares effective at the close of business
on the Retraction Date and shall cause to be delivered to such holder the total
Retraction Price with respect to such shares in accordance with Section 6.4
hereof. If only a part of the Exchangeable Shares represented by any certificate
are redeemed or purchased by Devon pursuant to the Retraction Call right, a new
certificate for the balance of such Exchangeable Shares shall be issued to the
holder at the expense of the Corporation.
6.3 Upon receipt by the Corporation of a Retraction Request, the
Corporation shall immediately notify Devon thereof. In order to exercise the
Retraction Call Right, Devon must notify the Corporation in writing of its
determination to do so (the "Devon Call Notice") within two Business Days of
such notification. If Devon does not so notify the Corporation within such two
Business Days, the Corporation will notify the holder as soon as possible
thereafter that Devon will not exercise the Retraction Call Right. If Devon
delivers the Devon Call Notice within such two Business Days, and provided that
the Retraction Request is not revoked by the holder in the manner specified in
Section 6.7, the Retraction Request shall thereupon be considered only to be an
offer by the holder to sell the Retracted Shares to Devon in accordance with the
Retraction Call Right. In such event, the Corporation shall not redeem the
Retracted Shares and Devon shall purchase from such holder and such holder shall
sell to Devon on the Retraction Date the Retracted Shares for a purchase price
per share (the "Purchase Price") equal to the Retraction Price. For the purposes
of completing a purchase pursuant to the Retraction Call Right, Devon shall
deposit with the Transfer Agent, on or before the Retraction Date, the
Exchangeable Share Consideration representing the total Purchase Price. Provided
that such Exchangeable Share Consideration has been so deposited with the
Transfer Agent, the closing of the purchase and sale of the Retracted Shares
pursuant to the Retraction Call Right shall be deemed to have occurred as at the
close of business on the Retraction Date and, for greater certainty, no
redemption by the Corporation of such Retracted Shares shall take place on the
Retraction Date. In the event that Devon does not deliver a Devon Call Notice
within two Business Days or otherwise comply with these Exchangeable Share
provisions in respect thereto, and provided that Retraction Request is not
revoked by the holder in the manner specified in Section 6.7, the Corporation
shall redeem the Retracted Shares on the Retraction Date and in the manner
otherwise contemplated in this Article 6.
6.4 The Corporation or Devon, as the case may be, shall deliver or cause
the Transfer Agent to deliver to the relevant holder, at the address of the
holder recorded in the securities register of the Corporation for the
Exchangeable Shares or at the address specified in the holder's Retraction
Request or by holding for pick up by the holder at the registered office of the
Corporation or at any office of the Transfer Agent as may be specified by the
Corporation in Schedule A hereto or by notice to the holders of Exchangeable
Shares, the Exchangeable Share Consideration representing the total Retraction
Price or the total Purchase Price, as the case may be, and such delivery of such
Exchangeable Share Consideration to the Transfer Agent shall be deemed to be
payment of and shall satisfy and discharge all liability for the total
Retraction Price or total Purchase Price, as the case may be, except as to any
cheque included therein which is not paid on due presentation.
6.5 On and after the close of business on the Retraction Date, the holder
of the Retracted Shares shall cease to be a holder of such Retracted Shares and
shall not be entitled to exercise any of the rights of a holder in respect
thereof, other than the right to receive such holder's proportionate part of the
total Retraction Price or total Purchase Price, as the case may be, unless upon
presentation and surrender of certificates in accordance with the foregoing
provisions, payment of the total Retraction Price or the total Purchase Price,
as the case may be, shall not be made, in which case the rights of such holder
shall remain unaffected until the
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Exchangeable Share Consideration representing the total Retraction Price or the
total Purchase Price, as the case may be, has been paid in the manner
hereinbefore provided. On and after the close of business on the Retraction
Date, provided that presentation and surrender of certificates and payment of
the Exchangeable Share Consideration representing the total Retraction Price or
the total Purchase Price, as the case may be, has been made in accordance with
the foregoing provisions, the holder of the Retracted Shares so redeemed by the
Corporation or purchased by Devon shall thereafter be considered and deemed for
all purposes to be a holder of the Devon Common Stock delivered to it.
Notwithstanding the foregoing, until such payment of such Exchangeable Share
Consideration to the holder, the holder shall be deemed to still be a holder of
Exchangeable Shares for purposes of all voting rights with respect thereto under
the Voting and Exchange Trust Agreement.
6.6 Notwithstanding any other provision of this Article 6, the Corporation
shall not be obligated to redeem Retracted Shares specified by a holder in a
Retraction Request to the extent that such redemption of Retracted Shares would
be contrary to liquidity or solvency requirements or other provisions of
applicable law. If the Corporation believes that on any Retraction Date it would
not be permitted by any of such provisions to redeem the Retracted Shares
tendered for redemption on such date, and provided that Devon shall not have
exercised the Retraction Call Right with respect to the Retracted Shares, the
Corporation shall only be obligated to redeem Retracted Shares specified by a
holder in a Retraction Request to the extent of the maximum number that may be
so redeemed (rounded down to a whole number of shares) as would not be contrary
to such provisions and shall notify the holder at least two Business Days prior
to the Retraction Date as to the number of Retracted Shares which will not be
redeemed by the Corporation. In any case in which the redemption by the
Corporation of Retracted Shares would be contrary to liquidity or solvency
requirements or other provisions of applicable law, the Corporation shall redeem
Retracted Shares in accordance with Section 6.2 of these share provisions on a
pro rata basis and shall issue to each holder of Retracted Shares a new
certificate, at the expense of the Corporation, representing the Retracted
Shares not redeemed by the Corporation pursuant to Section 6.2 hereof. Provided
that the Retraction Request is not revoked by the holder in the manner specified
in Section 6.7, the holder of any such Retracted Shares not redeemed by the
Corporation pursuant to Section 6.2 of these share provisions as a result of
liquidity or solvency requirements or applicable law shall be deemed by giving
the Retraction Request to require Devon to purchase such Retracted Shares from
such holder on the Retraction Date or as soon as practicable thereafter on
payment by Devon to such holder of the Purchase Price for each such Retracted
Share, all as more specifically provided in the Voting and Exchange Trust
Agreement, and Devon shall make such purchase.
6.7 A holder of Retracted Shares may, by notice in writing given by the
holder to the Corporation before the close of business on the Business Day
immediately preceding the Retraction Date, withdraw its Retraction Request in
which event such Retraction Request shall be null and void and, for greater
certainty, the revocable offer constituted by the Retraction Request to sell the
Retracted Shares to Devon shall be deemed to have been revoked.
ARTICLE 7
REDEMPTION OF EXCHANGEABLE SHARES BY THE CORPORATION
7.1 Subject to applicable law, and if Devon does not exercise the
Redemption Call Right, the Corporation shall on the Automatic Redemption Date
redeem the whole of the then outstanding Exchangeable Shares for an amount equal
to the Exchangeable Share Price applicable on the last Business Day prior to the
Automatic Redemption Date (the "Redemption Price") in accordance with Section
7.3. In connection with payment of the Redemption Price, the Corporation shall
be entitled to liquidate some of the Devon Common Stock which would otherwise be
deliverable as Exchangeable Share Consideration to the particular holder of
Exchangeable Shares in order to fund any statutory withholding tax obligation.
7.2 In any case of a redemption of Exchangeable Shares under this Article
7, the Corporation, or the Transfer Agent on behalf of the Corporation, shall,
at least 45 days before an Automatic Redemption Date or before a possible
Automatic Redemption Date which may result from a failure of the holders of
Exchangeable Shares to take necessary action as described in clause (d) of the
definition of Automatic Redemption Date
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send or cause to be sent to each holder of Exchangeable Shares a notice in
writing of the redemption or possible redemption by the Corporation or the
purchase by Devon under the Redemption Call Right, as the case may be, of the
Exchangeable Shares held by such holder. Such notice shall set out the formula
for determining the Redemption Price or the Redemption Call Purchase Price, as
the case may be, the Automatic Redemption Date and, if applicable, particulars
of the Redemption Call Right. In the case of any notice given in connection with
a possible Automatic Redemption Date, such notice will be given contingently and
will be withdrawn if the contingency does not occur.
7.3 On or after the Automatic Redemption Date and subject to the exercise
by Devon of the Redemption Call Right, the Corporation shall cause to be
delivered to the holders of the Exchangeable Shares to be redeemed the
Redemption Price for each such Exchangeable Share upon presentation and
surrender at the registered office of the Corporation or at any office of the
Transfer Agent as may be specified by the Corporation in such notice of the
certificates representing such Exchangeable Shares, together with such other
documents and instruments as may be required to effect a transfer of
Exchangeable Shares under applicable law and the by-laws of the Corporation and
such additional documents and instruments as the Transfer Agent may reasonably
require. Payment of the total Redemption Price for such Exchangeable Shares
shall be made by delivery to each holder, at the address of the holder recorded
in the securities register or at any office of the Transfer Agent as may be
specified by the Corporation in such notice, on behalf of the Corporation, of
the Exchangeable Share Consideration representing the total Redemption Price. On
and after the Automatic Redemption Date, the holders of the Exchangeable Shares
called for redemption shall cease to be holders of such Exchangeable Shares and
shall not be entitled to exercise any of the rights of holders in respect
thereof, other than the right to receive their proportionate part of the total
Redemption Price, unless payment of the total Redemption Price for such
Exchangeable Shares shall not be made upon presentation and surrender of
certificates in accordance with the foregoing provisions, in which case the
rights of the holders shall remain unaffected until the total Redemption Price
has been paid in the manner hereinbefore provided. The Corporation shall have
the right at any time after the sending of notice of its intention to redeem the
Exchangeable Shares as aforesaid to deposit or cause to be deposited the
Exchangeable Share Consideration with respect to the Exchangeable Shares so
called for redemption, or of such of the said Exchangeable Shares represented by
certificates that have not at the date of such deposit been surrendered by the
holders thereof in connection with such redemption, in a custodial account or
for safe keeping, in the case of non-cash items, with any chartered bank or
trust company in Canada named in such notice. Upon the later of such deposit
being made and the Automatic Redemption Date, the Exchangeable Shares in respect
whereof such deposit shall have been made shall be redeemed and the rights of
the holders thereof after such deposit or Automatic Redemption Date, as the case
may be, shall be limited to receiving their proportionate part of the total
Redemption Price for such Exchangeable Shares so deposited, against presentation
and surrender of the said certificates held by them, respectively, in accordance
with the foregoing provisions. Upon such payment or deposit of such Exchangeable
Share Consideration, the holders of the Exchangeable Shares shall thereafter be
considered and deemed for all purposes to be holders of the Devon Common Stock
delivered to them. Notwithstanding the foregoing, until such payment or deposit
of such Exchangeable Share Consideration is made, the holder shall be deemed to
still be a holder of Exchangeable Shares for purposes of all voting rights with
respect thereto under the Voting and Exchange Trust Agreement.
ARTICLE 8
EXCHANGE PUT RIGHT
8.1 Upon and subject to the terms and conditions contained in these share
provisions and the Voting and Exchange Trust Agreement:
a. a holder of Exchangeable Shares shall have the right (the "Exchange
Put Right") at any time to require Devon to purchase all or any part of the
Exchangeable Shares of the holder; and
b. upon the exercise by the holder of the Exchange Put Right and
provided that, at the time of purchase, the Exchangeable Shares are listed
on a recognized Canadian stock exchange, the holder shall
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be required to sell to Devon, and Devon shall be required to purchase from
the holder, that number of Exchangeable Shares in respect of which the
Exchange Put Right is exercised, in consideration of the payment by Devon
of the Exchangeable Share Price applicable thereto (which shall be the
Exchangeable Share Price applicable on the last Business Day prior to
receipt of notice required under section 8.2) and delivery by or on behalf
of Devon of the Exchangeable Share Consideration representing the total
applicable Exchangeable Share Price. In connection with payment of the
Exchangeable Share Consideration, the Corporation shall be entitled to
liquidate some of the Devon Common Stock which would otherwise be
deliverable to the particular holder of Exchangeable Shares in order to
fund any statutory withholding tax obligation.
8.2 The Exchange Put Right provided in section 8.1 hereof and in Article 5
of the Voting and Exchange Trust Agreement may be exercised at any time by
notice in writing given by the holder to and received by the Trustee (the date
of such receipt, the "Exchange Put Date") and accompanied by presentation and
surrender of the certificates representing such Exchangeable Shares, together
with such documents and instruments as may be required to effect a transfer of
Exchangeable Shares under the Act and the by-laws of the Corporation and such
additional documents and instruments as the Trustee may reasonably require, at
the principal transfer offices in Calgary, Alberta and Toronto, Ontario of the
Trustee, or at such other office or offices of the Trustee or of other persons
designated by the Trustee for that purpose as may from time to time be
maintained by the Trustee for that purpose. Such notice may be (i) in the form
of the panel, if any, on the certificates representing Exchangeable Shares, (ii)
in the form of the notice and election contained in any letter of transmittal
distributed or made available by the Corporation for that purpose, or (iii) in
other form satisfactory to the Trustee (or such other persons aforesaid), shall
stipulate the number of Exchangeable Shares in respect of which the right is
exercised (which may not exceed the number of shares represented by certificates
surrendered to the Trustee), shall be irrevocable unless the exchange is not
completed in accordance herewith and with the Voting and Exchange Trust
Agreement and shall constitute the holder's authorization to the Trustee (and
such other persons aforesaid) to effect the exchange on behalf of the holder.
8.3 The completion of the sale and purchase referred to in section 8.1
shall be required to occur, and Devon shall be required to take all actions on
its part necessary to permit it to occur, not later than the close of business
on the third Business Day following the Exchange Put Date.
8.4 The surrender by the holder of Exchangeable Shares under section 8.2
shall constitute the representation, warranty and covenant of the holder that
the Exchangeable Shares so purchased are sold free and clear of any lien,
encumbrance, security interest or adverse claim or interest.
8.5 If a part only of the Exchangeable Shares represented by any
certificate are to be sold and purchased pursuant to the exercise of the
Exchange Put Right, a new certificate for the balance of such Exchangeable
Shares shall be issued to the holder at the expense of the Corporation.
8.6 Upon receipt by the Trustee of the notice, certificates and other
documents or instruments required by section 8.2, the Trustee shall deliver or
cause to be delivered, on behalf of Devon and subject to receipt by the Trustee
from Devon of the applicable Exchangeable Share Consideration, to the relevant
holder at the address of the holder specified in the notice or by holding for
pick-up by the holder at the registered office of the Corporation or at any
office of the Trustee (or other persons aforesaid) maintained for that purpose,
the Exchangeable Share Consideration representing the total applicable
Exchangeable Share Price, within the time stipulated in section 8.3. Delivery by
Devon to the Trustee of such Exchangeable Share Consideration shall be deemed to
be payment of and shall satisfy and discharge all liability for the total
applicable Exchangeable Share Price, except as to any cheque included therein
which is not paid on due presentation.
8.7 On and after the close of business on the Exchange Put Date, the
holder of the Exchangeable Shares in respect of which the Exchange Put Right is
exercised shall not be entitled to exercise any of the rights of a holder in
respect thereof, other than the right to receive the total applicable
Exchangeable Share Price, unless upon presentation and surrender of certificates
in accordance with the foregoing provisions, payment of the Exchangeable Share
Consideration shall not be made, in which case the rights of such holder shall
remain unaffected until such payment has been made. On and after the close of
business on the
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Exchange Put Date provided that presentation and surrender of certificates and
payment of the Exchangeable Share Consideration has been made in accordance with
the foregoing provisions, the holder of the Exchangeable Shares so purchased by
Devon shall thereafter be considered and deemed for all purposes to be a holder
of the Devon Common Stock delivered to it. Notwithstanding the foregoing, until
payment of the Exchangeable Share Consideration to the holder, the holder shall
be deemed to still be a holder of Exchangeable Shares for purposes of all voting
rights with respect thereto under the Voting and Exchange Trust Agreement.
ARTICLE 9
VOTING RIGHTS
9.1 Except as required by applicable law and the provisions hereof, the
holders of the Exchangeable Shares shall not be entitled as such to receive
notice of or to attend any meeting of the shareholders of the Corporation or to
vote at any such meeting.
ARTICLE 10
AMENDMENT AND APPROVAL
10.1 The rights, privileges, restrictions and conditions attaching to the
Exchangeable Shares may be added to, changed or removed but, except as
hereinafter provided, only with the approval of the holders of the Exchangeable
Shares given as hereinafter specified.
10.2 Any approval given by the holders of the Exchangeable Shares to add
to, change or remove any right, privilege, restriction or condition attaching to
the Exchangeable Shares or any other matter requiring the approval or consent of
the holders of the Exchangeable Shares shall be deemed to have been sufficiently
given if it shall have been given in accordance with applicable law subject to a
minimum requirement that such approval be evidenced by resolution passed by not
less than 66 2/3% of the votes cast on such resolution by persons represented in
person or by proxy at a meeting of holders of Exchangeable Shares (excluding
Exchangeable Shares beneficially owned by Devon or its Subsidiaries) duly called
and held at which the holders of at least 25% of the outstanding Exchangeable
Shares at that time are present or represented by proxy. If at any such meeting
the holders of at least 25% of the outstanding Exchangeable Shares at that time
are not present or represented by proxy within one-half hour after the time
appointed for such meeting, then the meeting shall be adjourned to such date not
less than 10 days thereafter and to such time and place as may be designated by
the Chairman of such meeting. At such adjourned meeting, the holders of
Exchangeable Shares present or represented by proxy thereat may transact the
business for which the meeting was originally called and a resolution passed
thereat by the affirmative vote of not less than 66 2/3% of the votes cast on
such resolution by persons represented in person or by proxy at such meeting
(excluding Exchangeable Shares beneficially owned by Devon or its Subsidiaries)
shall constitute the approval or consent of the holders of the Exchangeable
Shares. For the purposes of this section, any spoiled votes, illegible votes,
defective votes and abstinences shall be deemed to be votes not cast.
ARTICLE 11
RECIPROCAL CHANGES, ETC. IN RESPECT OF DEVON COMMON STOCK
11.1
a. Each holder of an Exchangeable Share acknowledges that the Support
Agreement provides, in part, that Devon will not:
i. issue or distribute shares of Devon Common Stock (or securities
exchangeable for or convertible into or carry rights to acquire shares of
Devon Common Stock) to the holders of all or substantially all of the then
outstanding shares of Devon Common Stock by way of stock dividend or other
distribution; or
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ii. issue or distribute rights, options or warrants to the holders of
all or substantially all of the then outstanding shares of Devon Common
Stock entitling them to subscribe for or to purchase shares of Devon Common
Stock (or securities exchangeable for or convertible into or carrying
rights to acquire shares of Devon Common Stock); or
iii. issue or distribute to the holders of all or substantially all of
the then outstanding shares of Devon Common Stock (A) shares or securities
of Devon of any class other than Devon Common Stock (other than shares
convertible into or exchangeable for or carrying rights to acquire shares
of Devon Common Stock), (B) rights, options or warrants other than those
referred to in subsection 11.1(a)(ii) above, (C) evidences of indebtedness
of Devon or (D) assets of Devon;
unless
iv. one or both of Devon and the Corporation is permitted under
applicable law to issue or distribute the economic equivalent on a per
share basis of such rights, options, warrants, securities, shares,
evidences of indebtedness or other assets to the holders of the
Exchangeable Shares; and
v. one or both of Devon and the Corporation shall issue or distribute
the economic equivalent on a per share basis of such rights, options,
warrants, securities, shares, evidences of indebtedness or other assets
simultaneously to the holders of the Exchangeable Shares.
b. Each holder of an Exchangeable Share acknowledges that the Support
Agreement further provides, in part, that Devon will not:
i. subdivide, redivide or change the then outstanding shares of Devon
Common Stock into a greater number of shares of Devon Common Stock; or
ii. reduce, combine or consolidate or change the then outstanding
shares of Devon Common Stock into a lesser number of shares of Devon Common
Stock; or
iii. reclassify or otherwise change the shares of Devon Common Stock
or effect an amalgamation, merger, reorganization or other transaction
involving or affecting the shares of Devon Common Stock;
unless
iv. the Corporation is permitted under applicable law to
simultaneously make the same or an economically equivalent change to, or in
the rights of the holders of, the Exchangeable Shares; and
v. the same or an economically equivalent change is simultaneously
made to, or in the rights of the holders of, the Exchangeable Shares.
The Support Agreement further provides, in part, that, with the exception
of certain ministerial amendments, the aforesaid provisions of the Support
Agreement shall not be changed without the approval of the holders of the
Exchangeable Shares given in accordance with Article 10 of these share
provisions.
ARTICLE 12
ACTIONS BY THE CORPORATION UNDER SUPPORT AGREEMENT
12.1 The Corporation will take all such actions and do all such things as
shall be necessary or advisable to perform and comply with and to ensure
performance and compliance by Devon with all provisions of the Support
Agreement, the Voting Trust and Exchange Agreement and Devon's Amended and
Restated Certificate of Incorporation applicable to the Corporation and Devon,
respectively, in accordance with the terms thereof including, without
limitation, taking all such actions and doing all such things as shall be
necessary or advisable to enforce to the fullest extent possible for the direct
benefit of the Corporation all rights and benefits in favour of the Corporation
under or pursuant thereto.
12.2 The Corporation shall not propose, agree to or otherwise give effect
to any amendment to, or waiver or forgiveness of its rights or obligations
under, the Support Agreement, the Voting Trust and
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Exchange Agreement or Devon's Amended and Restated Certificate of Incorporation
without the approval of the holders of the Exchangeable Shares given in
accordance with Article 10 of these share provisions other than such amendments,
waivers and/or forgiveness as may be necessary or advisable for the purpose of:
a. adding to the covenants of the other party or parties to such
agreement for the protection of the Corporation or the holders of
Exchangeable Shares; or
b. making such provisions or modifications not inconsistent with such
agreement or certificate as may be necessary or desirable with respect to
matters or questions arising thereunder which, in the opinion of the Board
of Directors, it may be expedient to make, provided that the Board of
Directors shall be of the opinion, after consultation with counsel, that
such provisions and modifications will not be prejudicial to the interests
of the holders of the Exchangeable Shares; or
c. making such changes in or corrections to such agreement or
certificate which, on the advice of counsel to the Corporation, are
required for the purpose of curing or correcting any ambiguity or defect or
inconsistent provision or clerical omission or mistake or manifest error
contained therein, provided that the Board of Directors shall be of the
opinion, after consultation with counsel, that such changes or corrections
will not be prejudicial to the interests of the holders of the Exchangeable
Shares.
ARTICLE 13
LEGEND
13.1 The certificates evidencing the Exchangeable Shares shall contain or
have affixed thereto a legend, in form and on terms approved by the Board of
Directors, with respect to the Support Agreement, the provisions of the Plan of
Arrangement relating to the Liquidation Call Right, the Retraction Call Right
and the Redemption Call Right, and the Voting and Exchange Trust Agreement
(including the provisions with respect to the voting rights and exchange
provisions thereunder).
ARTICLE 14
MISCELLANEOUS
14.1 Any notice, request or other communication to be given to the
Corporation by a holder of Exchangeable Shares shall be in writing and shall be
valid and effective if given by mail (postage prepaid) or by telecopy or by
delivery to the registered office of the Corporation and addressed to the
attention of the President. Any such notice, request or other communication, if
given by mail, telecopy or delivery, shall only be deemed to have been given and
received upon actual receipt thereof by the Corporation.
14.2 Any presentation and surrender by a holder of Exchangeable Shares to
the Corporation or the Transfer Agent of certificates representing Exchangeable
Shares in connection with the liquidation, dissolution or winding-up of the
Corporation or the retraction, redemption or exchange of Exchangeable Shares
shall be made by registered mail (postage prepaid) or by delivery to the
registered office of the Corporation or to such office of the Transfer Agent as
may be specified by the Corporation, in each case addressed to the attention of
the President of the Corporation. Any such presentation and surrender of
certificates shall only be deemed to have been made and to be effective upon
actual receipt thereof by the Corporation or the Transfer Agent, as the case may
be, and the method of any such presentation and surrender of certificates shall
be at the sole risk of the holder.
14.3 Any notice, request or other communication to be given to a holder of
Exchangeable Shares by or on behalf of the Corporation shall be in writing and
shall be valid and effective if given by mail (postage prepaid) or by delivery
to the address of the holder recorded in the securities register of the
Corporation or, in the event of the address of any such holder not being so
recorded, then at the last address of such holder known to the Corporation. Any
such notice, request or other communication, if given by mail, shall be deemed
to have been given and received on the fifth Business Day following the date of
mailing and, if given by
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delivery, shall be deemed to have been given and received on the date of
delivery. Accidental failure or omission to give any notice, request or other
communication to one or more holders of Exchangeable Shares shall not invalidate
or otherwise alter or affect any action or proceeding to be or intended to be
taken by the Corporation.
14.4 For greater certainty, the Corporation shall not be required for any
purpose under these share provisions to recognize or take account of persons who
are not so recorded in such securities register.
14.5 All Exchangeable Shares acquired by the Corporation upon the
redemption or retraction thereof shall be canceled.
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SCHEDULE "A"
RETRACTION REQUEST
To the Corporation and Devon Energy Corporation ("Devon")
This request is given pursuant to Article 6 of the provisions (the "Share
Provisions") attaching to the Exchangeable Shares of the Corporation and all
capitalized words and expressions used in this request which are defined in the
Share Provisions have the meaning attributed to such words and expressions in
such Share Provisions.
The undersigned hereby notifies the Corporation that, subject to the
Retraction Call Right referred to below, the undersigned requests the
Corporation to redeem in accordance with Article 6 of the Share Provisions:
[ ] all share(s) represented by the accompanying certificate(s); or
[ ] share(s) only.
--------------------
The undersigned hereby notifies the Corporation that the Retraction Date
shall be .
NOTE: The Retraction Date must be a Business Day and must not be less than
five Business Days nor more than 10 Business Days after the date upon
which this notice and the accompanying shares are received at the
registered office of the Corporation or at any office of the Transfer
Agent as may be specified in this Retraction Request or as may be
specified by the Corporation by notice to the holders of the
Exchangeable Shares. In the event that no such Business Day is
correctly specified above, the Retraction Date shall be deemed to be
the tenth Business Day after the date on which this request is
received by the Corporation.
The undersigned acknowledges the Retraction Call Right of Devon to purchase
all but not less than all the Retracted Shares from the undersigned and that
this request shall be deemed to be a revocable offer by the undersigned to sell
the Retracted Shares to Devon in accordance with the Retraction Call Right on
the Retraction Date for the Retraction Price and on the other terms and
conditions set out in Section 6.3 of the Share Provisions. If Devon determines
not to exercise the Retraction Call Right, the Corporation will notify the
undersigned of such fact as soon as possible. This retraction request, and offer
to sell the Retracted Shares to Devon, may be revoked and withdrawn by the
undersigned by notice in writing given to the Corporation at any time before the
close of business on the Business Date immediately preceding the Retraction
Date.
The undersigned acknowledges that if, as a result of liquidity or solvency
provisions of applicable law, the Corporation is unable to redeem all Retracted
Shares, the undersigned will be deemed to have exercised the Exchange Right (as
defined in the Voting and Exchange Trust Agreement) so as to require Devon to
purchase the unredeemed Retracted Shares.
The undersigned hereby represents and warrants to the Corporation and Devon
that the undersigned has good title to, and owns, the share(s) represented by
the accompanying certificate free and clear of all liens, claims, encumbrances,
security interests and adverse claims or interests.
<TABLE>
<S> <C> <C>
- ------------------ ------------------------------------------ ------------------------------------------
(Date) (Signature of Shareholder) (Guarantee of Signature)
</TABLE>
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[ ] Please check box if the legal or beneficial owner of the Retracted
Shares is a non-resident of Canada.
[ ] Please check box if the securities and any cheque(s) or other non-cash
assets resulting from the retraction of the Retracted Shares are to be
held for pick-up by the shareholder at the principal transfer offices
of CIBC Mellon Trust Company (the "Transfer Agent") in Calgary, Alberta
or Toronto, Ontario, failing which the securities and any cheque(s) or
other non-cash assets will be delivered to the shareholder in
accordance with the share provisions.
NOTE: This panel must be completed and the accompanying certificate,
together with such additional documents as the Transfer Agent may
require, must be deposited with the Transfer Agent at its principal
transfer offices in Calgary, Alberta or Toronto, Ontario. The
securities and any cheque(s) or other non-cash assets resulting from
the retraction or purchase of the Retracted Shares will be issued and
registered in, and made payable to, or transferred into,
respectively, the name of the shareholder as it appears on the
register of the Corporation and the securities, cheque(s) and other
non-cash assets resulting from such retraction or purchase will be
delivered to the shareholder in accordance with the Share Provisions.
<TABLE>
<S> <C>
- --------------------------------------------------- ---------------------------------------------------
Name of Person in Whose Name Securities or Date
Cheque(s) or Other Non-cash Assets Are To Be
Registered, Issued or Delivered (please print)
- --------------------------------------------------- ---------------------------------------------------
Street Address or P.O. Box Signature of Shareholder
- --------------------------------------------------- ---------------------------------------------------
City, Province Signature Guaranteed by
</TABLE>
NOTE: If this retraction request is for less than all of the share(s)
represented by the accompanying certificate, a certificate
representing the remaining shares of the Corporation will be issued
and registered in the name of the shareholder as it appears on the
register of the Corporation or its lawful transferee.
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ANNEX F
SUPPORT AGREEMENT
THIS SUPPORT AGREEMENT is entered into as of --, 1998, between Devon Energy
Corporation, an Oklahoma corporation ("Devon"), and Northstar Energy
Corporation, an Alberta corporation ("Northstar").
RECITALS
WHEREAS, pursuant to a Combination Agreement dated as of June 29, 1998, by
and between Devon and Northstar (such agreement, as it may be amended or
restated, is hereinafter referred to as the "Combination Agreement"), the
parties agreed that on the Effective Date (as defined in the Combination
Agreement), Devon and Northstar would execute and deliver a Support Agreement
containing the terms and conditions set forth in Exhibit D to the Combination
Agreement together with such other terms and conditions as may be agreed to by
the parties to the Combination Agreement acting reasonably.
WHEREAS, pursuant to an arrangement (the "Arrangement") effected by
Articles of Arrangement dated --, 1998 filed pursuant to the Business
Corporations Act (Alberta) (or any successor or other corporate statute by which
Northstar may in the future be governed) (the "Act") each issued and outstanding
common share of Northstar (a "Northstar Common Share") was exchanged for issued
and outstanding Exchangeable Shares of Northstar (the "Exchangeable Shares").
WHEREAS, the Articles of Amendment of Northstar set forth the rights,
privileges, restrictions and conditions (collectively, the "Exchangeable Share
Provisions") attaching to the Exchangeable Shares.
WHEREAS, the parties hereto desire to make appropriate provision and to
establish a procedure whereby Devon will take certain actions and make certain
payments and deliveries necessary to ensure that Northstar will be able to make
certain payments and to deliver or cause to be delivered shares of Devon Common
Stock in satisfaction of the obligations of Northstar under the Exchangeable
Share Provisions with respect to the payment and satisfaction of dividends,
Liquidation Amounts, Retraction Prices and Redemption Prices, all in accordance
with the Exchangeable Share Provisions.
NOW, THEREFORE, in consideration of the respective covenants and agreements
provided in this agreement and for other good and valuable consideration (the
receipt and sufficiency of which are hereby acknowledged), the parties agree as
follows:
ARTICLE 1
DEFINITIONS AND INTERPRETATION
1.1 DEFINED TERMS
Each term denoted herein by initial capital letters and not otherwise
defined herein shall have the meaning attributed thereto in the Exchangeable
Share Provisions, unless the context requires otherwise.
1.2 INTERPRETATION NOT AFFECTED BY HEADINGS, ETC.
The division of this agreement into articles, sections and paragraphs and
the insertion of headings are for convenience of reference only and shall not
affect the construction or interpretation of this agreement.
1.3 NUMBER, GENDER, ETC.
Words importing the singular number only shall include the plural and vice
versa. Words importing the use of any gender shall include all genders.
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1.4 DATE FOR ANY ACTION
If any date on which any action is required to be taken under this
agreement is not a Business Day, such action shall be required to be taken on
the next succeeding Business Day.
ARTICLE 2
COVENANTS OF DEVON AND NORTHSTAR
2.1 COVENANTS OF DEVON REGARDING EXCHANGEABLE SHARES
So long as any Exchangeable Shares are outstanding, Devon will:
(a) not declare or pay any dividend on Devon Common Stock unless (i)
Northstar will have sufficient assets, funds and other property available
to enable the due declaration and the due and punctual payment in
accordance with applicable law of an equivalent dividend on the
Exchangeable Shares and (ii) subsection 2.1(b) shall be complied with in
connection with such dividend;
(b) cause Northstar to declare simultaneously with the declaration of
any dividend on Devon Common Stock an equivalent dividend on the
Exchangeable Shares and, when such dividend is paid on Devon Common Stock,
cause Northstar to pay simultaneously therewith such equivalent dividend on
the Exchangeable Shares, in each case in accordance with the Exchangeable
Share Provisions;
(c) advise Northstar sufficiently in advance of the declaration by
Devon of any dividend on Devon Common Stock and take all such other actions
as are necessary, in cooperation with Northstar, to ensure that the
respective declaration date, record date and payment date for a dividend on
the Exchangeable Shares shall be the same as the record date, declaration
date and payment date for the corresponding dividend on Devon Common Stock
and that such dividend on the Exchangeable Shares will correspond with any
requirement of the principal stock exchange on which the Exchangeable
Shares are listed;
(d) ensure that the record date for any dividend declared on Devon
Common Stock is not less than ten Business Days after the declaration date
for such dividend;
(e) take all such actions and do all such things as are necessary or
desirable to enable and permit Northstar, in accordance with applicable
law, to pay and otherwise perform its obligations with respect to the
satisfaction of the Liquidation Amount in respect of each issued and
outstanding Exchangeable Share upon the liquidation, dissolution or
winding-up of Northstar or any other distribution of the assets of
Northstar for the purpose of winding-up its affairs, including without
limitation all such actions and all such things as are necessary or
desirable to enable and permit Northstar to cause to be delivered shares of
Devon Common Stock to the holders of Exchangeable Shares in accordance with
the provisions of Article 5 of the Exchangeable Share Provisions;
(f) take all such actions and do all such things as are necessary or
desirable to enable and permit Northstar, in accordance with applicable
law, to pay and otherwise perform its obligations with respect to the
satisfaction of the Retraction Price and the Redemption Price, including
without limitation all such actions and all such things as are necessary or
desirable to enable and permit Northstar to cause to be delivered shares of
Devon Common Stock to the holders of Exchangeable Shares, upon the
retraction or redemption of the Exchangeable Shares in accordance with the
provisions of Article 6 or Article 7 of the Exchangeable Share Provisions,
as the case may be; and
(g) not exercise its vote as a direct or indirect shareholder to
initiate the voluntary liquidation, dissolution or winding-up of Northstar
nor take any action or omit to take any action that is designed to result
in the liquidation, dissolution or winding-up of Northstar.
2.2 SEGREGATION OF FUNDS
Devon will cause Northstar to deposit a sufficient amount of funds in a
separate account and segregate a sufficient amount of such assets and other
property as is necessary to enable Northstar to pay or otherwise
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satisfy the applicable dividends, Liquidation Amount, Retraction Price or
Redemption Price, in each case for the benefit of holders from time to time of
the Exchangeable Shares, and Northstar will use such funds, assets and other
property so segregated exclusively for the payment of dividends and the payment
or other satisfaction of the Liquidation Amount, the Retraction Price or the
Redemption Price, as applicable, net of any corresponding withholding tax
obligations and for the remittance of such withholding tax obligations.
2.3 RESERVATION OF SHARES OF DEVON COMMON STOCK
Devon hereby represents, warrants and covenants that it has irrevocably
reserved for issuance and will at all times keep available, free from
pre-emptive and other rights, out of its authorized and unissued capital stock
such number of shares of Devon Common Stock (or other shares or securities into
which Devon Common Stock may be reclassified or changed as contemplated by
section 2.7 hereof) (i) as is equal to the sum of (A) the number of Exchangeable
Shares issued and outstanding from time to time and (B) the number of
Exchangeable Shares issuable upon the exercise of all rights to acquire
Exchangeable Shares outstanding from time to time and (ii) as are now and may
hereafter be required to enable and permit Northstar to meet its obligations
hereunder, under the Voting and Exchange Trust Agreement, under the Exchangeable
Share Provisions and under any other security or commitment pursuant to the
Arrangement with respect to which Devon may now or hereafter be required to
issue shares of Devon Common Stock.
2.4 NOTIFICATION OF CERTAIN EVENTS
In order to assist Devon to comply with its obligations hereunder,
Northstar will give Devon notice of each of the following events at the time set
forth below:
(a) immediately, in the event of any determination by the Board of
Directors of Northstar to take any action which would require a vote of the
holders of Exchangeable Shares for approval;
(b) immediately, upon the earlier of (i) receipt by Northstar of
notice of, and (ii) Northstar otherwise becoming aware of, any threatened
or instituted claim, suit, petition or other proceedings with respect to
the involuntary liquidation, dissolution or winding-up of Northstar or to
effect any other distribution of the assets of Northstar among its
shareholders for the purpose of winding-up its affairs;
(c) immediately, upon receipt by Northstar of a Retraction Request (as
defined in the Exchangeable Share Provisions);
(d) at least 130 days prior to any Automatic Redemption Date
determined by the Board of Directors of Northstar in accordance with clause
(b) of the definition of Automatic Redemption Date in the Exchangeable
Share Provisions;
(e) as soon as practicable upon the issuance by Northstar of any
Exchangeable Shares or rights to acquire Exchangeable Shares; and
(f) in the event of any determination by the Board of Directors of
Northstar to institute voluntary liquidation, dissolution or winding-up
proceedings with respect to Northstar or to effect any other distribution
of the assets of Northstar among its shareholders for the purpose of
winding-up its affairs, at least 60 days prior to the proposed effective
date of such liquidation, dissolution, winding-up or other distribution.
2.5 DELIVERY OF SHARES OF DEVON COMMON STOCK
In furtherance of its obligations hereunder, upon notice of any event which
requires Northstar to cause to be delivered shares of Devon Common Stock to any
holder of Exchangeable Shares, Devon shall forthwith issue and deliver the
requisite shares of Devon Common Stock to or to the order of the former holder
of the surrendered Exchangeable Shares, as Northstar shall direct. All such
shares of Devon Common Stock shall be duly issued as fully paid and
non-assessable and shall be free and clear of any lien, claim, encumbrance,
security interest or adverse claim or interest.
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2.6 QUALIFICATION OF SHARES OF DEVON COMMON STOCK
Devon covenants that if any shares of Devon Common Stock (or other shares
or securities into which Devon Common Stock may be reclassified or changed as
contemplated by Section 2.7 hereof) to be issued and delivered hereunder
(including for greater certainty, pursuant to the Exchangeable Share Provisions,
or pursuant to the Exchange Put Right, the Exchange Right or the Automatic
Exchange Rights (all as defined in the Voting and Exchange Trust Agreement))
require registration or qualification with or approval of or the filing of any
document including any prospectus or similar document, the taking of any
proceeding with or the obtaining of any order, ruling or consent from any
governmental or regulatory authority under any Canadian or United States
federal, provincial or state law or regulation or pursuant to the rules and
regulations of any regulatory authority, or the fulfillment of any other legal
requirement (collectively, the "Applicable Laws") before such shares (or other
shares or securities into which Devon Common Stock may be reclassified or
changed as contemplated by Section 2.7 hereof) may be issued and delivered by
Devon to the initial holder thereof (other than Northstar) or in order that such
shares may be freely traded thereafter (other than any restrictions on transfer
by reason of a holder being a "control person" of Devon for purposes of Canadian
federal or provincial securities law or an "affiliate" of Devon for purposes of
United States federal or state securities law), Devon will in good faith
expeditiously take all such actions and do all such things as are necessary to
cause such shares of Devon Common Stock (or other shares or securities into
which Devon Common Stock may be reclassified or changed as contemplated by
Section 2.7 hereof) to be and remain duly registered, qualified or approved.
Devon represents and warrants that it has in good faith taken all actions and
done all things as are necessary under Applicable Laws as they exist on the date
hereof to cause the shares of Devon Common Stock (or other shares or securities
into which Devon Common Stock may be reclassified or changed as contemplated by
Section 2.7 hereof) to be issued and delivered hereunder (including, for greater
certainty, pursuant to the Exchangeable Share Provisions, or pursuant to the
Exchange Put Right, the Exchange Right and the Automatic Exchange Rights) to be
freely tradeable thereafter (other than restrictions on transfer by reason of a
holder being a "control person" of Devon for the purposes of Canadian federal
and provincial securities law or an "affiliate" of Devon for purposes of United
States federal or state securities law). Devon will in good faith expeditiously
take all such actions and do all such things as are necessary to cause all
shares of Devon Common Stock (or other shares or securities into which Devon
Common Stock may be reclassified or changed as contemplated by Section 2.7
hereof) to be delivered hereunder (including, for greater certainty, pursuant to
Exchangeable Share Provisions, or pursuant to the Exchange Put Right, the
Exchange Right or the Automatic Exchange Rights) to be listed, quoted or posted
for trading on all stock exchanges and quotation systems on which such shares
are listed, quoted or posted for trading at such time. Devon will in good faith
expeditiously take all such action and do all such things as are necessary to
cause all Exchangeable Shares to be and to continue to be listed and posted for
trading on The Toronto Stock Exchange or, in the event that a listing on The
Toronto Stock Exchange is not available, on another recognized Canadian stock
exchange.
2.7 EQUIVALENCE
(a) Devon will not:
(i) issue or distribute shares of Devon Common Stock (or securities
exchangeable for or convertible into or carrying rights to acquire shares
of Devon Common Stock) to the holders of all or substantially all of the
then outstanding shares of Devon Common Stock by way of stock dividend or
other distribution; or
(ii) issue or distribute rights, options or warrants to the holders of
all or substantially all of the then outstanding shares of Devon Common
Stock entitling them to subscribe for or to purchase shares of Devon Common
Stock (or securities exchangeable for or convertible into or carrying
rights to acquire shares of Devon Common Stock); or
(iii) issue or distribute to the holders of all or substantially all
of the then outstanding shares of Devon Common Stock (A) shares or
securities of Devon of any class other than Devon Common Stock (other than
shares convertible into or exchangeable for or carrying rights to acquire
shares of Devon
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Common Stock), (B) rights, options or warrants other than those referred to
in subsection 2.7 (a) (ii) above, (C) evidences of indebtedness of Devon or
(D) assets of Devon;
unless
(iv) one or both of Devon and Northstar is permitted under applicable
law to issue or distribute the economic equivalent on a per share basis of
such rights, options, warrants, securities, shares, evidences of
indebtedness or other assets to the holders of the Exchangeable Shares; and
(v) one or both of Devon and Northstar shall issue or distribute the
economic equivalent on a per share basis of such rights, options, warrants,
securities, shares, evidences of indebtedness or other assets
simultaneously to the holders of the Exchangeable Shares.
(b) Devon will not:
(i) subdivide, redivide or change the then outstanding shares of Devon
Common Stock into a greater number of shares of Devon Common Stock; or
(ii) reduce, combine or consolidate or change the then outstanding
shares of Devon Common Stock into a lesser number of shares of Devon Common
Stock; or
(iii) reclassify or otherwise change the shares of Devon Common Stock
or effect an amalgamation, merger, reorganization or other transaction
involving or affecting the shares of Devon Common Stock;
unless
(iv) Northstar is permitted under applicable law to simultaneously
make the same or an economically equivalent change to, or in the rights of
the holders of, the Exchangeable Shares; and
(v) the same or an economically equivalent change is simultaneously
made to, or in the rights of the holders of, the Exchangeable Shares.
(c) Devon will ensure that the record date for any event referred to in
section 2.7 (a) or 2.7(b) above, or (if no record date is applicable for such
event) the effective date for any such event, is not less than 20 Business Days
after the date on which such event is declared or announced by Devon (with
simultaneous notice thereof to be given by Devon to Northstar).
2.8 TENDER OFFERS, ETC.
In the event that a tender offer, share exchange offer, issuer bid,
take-over bid or similar transaction with respect to Devon Common Stock (an
"Offer") is proposed by Devon or is proposed to Devon or its shareholders and is
recommended by the Board of Directors of Devon, or is otherwise effected or to
be effected with the consent or approval of the Board of Directors of Devon,
Devon shall, in good faith, take all such actions and do all such things as are
necessary or desirable to enable and permit holders of Exchangeable Shares to
participate in such Offer to the same extent and on an equivalent basis as the
holders of shares of Devon Common Stock, without discrimination, including,
without limiting the generality of the foregoing, Devon will use its good faith
efforts expeditiously to (and shall, in the case of a transaction proposed by
Devon or where Devon is a participant in the negotiation thereof) ensure that
holders of Exchangeable Shares may participate in all such Offers without being
required to retract Exchangeable Shares as against Northstar (or, if so
required, to ensure that any such retraction shall be effective only upon, and
shall be conditional upon, the closing of the Offer and only to the extent
necessary to tender or deposit to the Offer).
2.9 OWNERSHIP OF OUTSTANDING SHARES
Without the prior approval of Northstar and the prior approval of the
holders of the Exchangeable Shares given in accordance with Section 10.2 of the
Exchangeable Share Provisions, Devon covenants and agrees in favor of Northstar
that, as long as any outstanding Exchangeable Shares are owned by any person or
entity other than Devon or any of its Subsidiaries, Devon will be and remain the
direct or indirect beneficial owner of all issued and outstanding Northstar
Common Shares and of at least 50.1% of all other outstanding securities
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of Northstar carrying or entitled to voting rights in any circumstances
generally for the election of directors, in each case other than the
Exchangeable Shares.
2.10 DEVON NOT TO VOTE EXCHANGEABLE SHARES
Devon covenants and agrees that it will appoint and cause to be appointed
proxy holders with respect to all Exchangeable Shares held by Devon and its
Subsidiaries for the sole purpose of attending each meeting of holders of
Exchangeable Shares in order to be counted as part of the quorum for each such
meeting. Devon further covenants and agrees that it will not, and will cause its
Subsidiaries not to, exercise any voting rights which may be exercisable by
holders of Exchangeable Shares from time to time pursuant to the Exchangeable
Share Provisions or pursuant to the provisions of the Act with respect to any
Exchangeable Shares held by it or by its Subsidiaries in respect of any matter
considered at any meeting of holders of Exchangeable Shares.
2.11 DUE PERFORMANCE
On and after the Effective Date, Devon shall duly and timely perform all of
its obligations provided for in connection with the Plan of Arrangement,
including any obligations that may arise upon the exercise of Devon's rights
under the Exchangeable Share Provisions.
ARTICLE 3
GENERAL
3.1 TERM
This agreement shall come into force and be effective as of the date hereof
and shall terminate and be of no further force and effect at such time as no
Exchangeable Shares (or securities or rights convertible into or exchangeable
for or carrying rights to acquire Exchangeable Shares) are held by any party
other than Devon and any of its Subsidiaries.
3.2 CHANGES IN CAPITAL OF DEVON AND NORTHSTAR
Notwithstanding the provisions of section 3.4 hereof, at all times after
the occurrence of any event effected pursuant to section 2.7 or 2.8 hereof, as a
result of which either Devon Common Stock or the Exchangeable Shares or both are
in any way changed, this agreement shall forthwith be amended and modified as
necessary in order that it shall apply with full force and effect, mutatis
mutandis, to all new securities into which Devon Common Stock or the
Exchangeable Shares or both are so changed, and the parties hereto shall as soon
as possible execute and deliver an agreement in writing giving effect to and
evidencing such necessary amendments and modifications.
3.3 SEVERABILITY
If any provision of this agreement is held to be invalid, illegal or
unenforceable, the validity, legality or enforceability of the remainder of this
agreement shall not in any way be affected or impaired thereby and this
agreement shall be carried out as nearly as possible in accordance with its
original terms and conditions.
3.4 AMENDMENTS, MODIFICATIONS, ETC.
This agreement may not be amended, modified or waived except by an
agreement in writing executed by Northstar and Devon and approved by the holders
of the Exchangeable Shares in accordance with Section 10.2 of the Exchangeable
Share Provisions.
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3.5 MINISTERIAL AMENDMENTS
Notwithstanding the provisions of section 3.4, the parties to this
agreement may in writing, at any time and from time to time, without the
approval of the holders of the Exchangeable Shares, amend or modify this
agreement for the purposes of:
(a) adding to the covenants of either or both parties for the
protection of the holders of the Exchangeable Shares;
(b) making such amendments or modifications not inconsistent with this
agreement as may be necessary or desirable with respect to matters or
questions which, in the opinion of the board of directors of each of
Northstar and Devon, it may be expedient to make, provided that each such
board of directors shall be of the opinion that such amendments or
modifications will not be prejudicial to the interests of the holders of
the Exchangeable Shares; or
(c) making such changes or corrections which, on the advice of counsel
to Northstar and Devon, are required for the purpose of curing or
correcting any ambiguity or defect or inconsistent provision or clerical
omission or mistake or manifest error; provided that the boards of
directors of each of Northstar and Devon shall be of the opinion that such
changes or corrections will not be prejudicial to the interests of the
holders of the Exchangeable Shares.
3.6 MEETING TO CONSIDER AMENDMENTS
Northstar, at the request of Devon, shall call a meeting or meetings of the
holders of the Exchangeable Shares for the purpose of considering any proposed
amendment or modification requiring approval of such shareholders. Any such
meeting or meetings shall be called and held in accordance with the by-laws of
Northstar, the Exchangeable Share Provisions and all Applicable Laws.
3.7 AMENDMENTS ONLY IN WRITING
No amendment to or modification or waiver of any of the provisions of this
agreement otherwise permitted hereunder shall be effective unless made in
writing and signed by both of the parties hereto.
3.8 INUREMENT
This agreement shall be binding upon and inure to the benefit of the
parties hereto and the holders, from time to time, of Exchangeable Shares and
each of their respective heirs, successors and assigns.
3.9 NOTICES TO PARTIES
All notices and other communications between the parties shall be in
writing and shall be deemed to have been given if delivered personally or by
confirmed telecopy to the parties at the following addresses (or at such other
address for either such party as shall be specified in like notice):
(a) if to Devon to:
Devon Energy Corporation
20 North Broadway
Suite 1500
Oklahoma City, Oklahoma
73102-8260
Attention: President
Facsimile No. 405-552-8171
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(b) if to Northstar to:
Northstar Energy Corporation
3000, 400 -- 3rd Avenue S.W.
Calgary, Alberta
T2P 4H2
Attention: President
Facsimile No. 403-213-8100
Any notice or other communication given personally shall be deemed to have
been given and received upon delivery thereof and if given by telecopy shall be
deemed to have been given and received on the date of confirmed receipt thereof,
unless such day is not a Business Day, in which case it shall be deemed to have
been given and received upon the immediately following Business Day.
3.10 COUNTERPARTS
This agreement may be executed in counterparts, each of which shall be
deemed an original, and all of which taken together shall constitute one and the
same instrument.
3.11 JURISDICTION
This agreement shall be construed and enforced in accordance with the laws
of the Province of Alberta and the federal laws of Canada applicable therein.
3.12 ATTORNMENT
Devon agrees that any action or proceeding arising out of or relating to
this agreement may be instituted in the courts of the Province of Alberta,
waives any objection which it may have now or hereafter to the venue of any such
action or proceeding, irrevocably submits to the jurisdiction of such courts in
any such action or proceeding, agrees to be bound by any judgment of such courts
and not to seek, and hereby waives, any review of the merits of any such
judgment by the courts of any other jurisdiction and hereby appoints Northstar
at its registered office in the Province of Alberta as Devon s attorney for
service of process.
IN WITNESS WHEREOF, Devon and Northstar have caused this agreement to be
signed by their respective officers thereunder duly authorized, all as of the
date first written above.
DEVON ENERGY CORPORATION
By:
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--
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NORTHSTAR ENERGY CORPORATION
By:
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ANNEX G
VOTING AND EXCHANGE TRUST AGREEMENT
THIS VOTING AND EXCHANGE TRUST AGREEMENT is entered into as of --, 1998, by
and between Devon Energy Corporation, an Oklahoma corporation ("Devon"),
Northstar Energy Corporation, an Alberta corporation ("Northstar"), and -- Trust
Company, a Canadian trust company ("Trustee").
WHEREAS, pursuant to a Combination Agreement dated as of June 29, 1998 by
and between Devon and Northstar (such agreement as it may be amended or restated
is hereinafter referred to as the "Combination Agreement"), the parties agreed
that on the Effective Date (as defined in the Combination Agreement), Devon and
Northstar would execute and deliver a Voting and Exchange Trust Agreement
containing the terms and conditions set forth in Exhibit E to the Combination
Agreement together with such other terms and conditions as may be agreed to by
the parties to the Combination Agreement acting reasonably.
WHEREAS, pursuant to an arrangement (the "Arrangement") effected by
Articles of Arrangement dated --, 1998 filed pursuant to the Business
Corporations Act (Alberta) (or any successor or other corporate statute by which
Northstar may in the future be governed) (the "Act"), each issued and
outstanding common share of Northstar (a "Northstar Common Share") was exchanged
for issued and outstanding Exchangeable Shares of Northstar (the "Exchangeable
Shares").
WHEREAS, the Articles of Amendment of Northstar set forth the rights,
privileges, restrictions and conditions attaching to the Exchangeable Shares
(collectively, the "Exchangeable Share Provisions").
WHEREAS, Devon is to provide voting rights in Devon to each holder (other
than Devon and its Subsidiaries) from time to time of Exchangeable Shares, such
voting rights per Exchangeable Share to be equivalent to the voting rights per
share of Devon Common Stock.
WHEREAS, Devon is to grant to and in favor of the holders (other than Devon
and its Subsidiaries) from time to time of Exchangeable Shares the right, in the
circumstances set forth herein, to require Devon to purchase from each such
holder all or any part of the Exchangeable Shares held by the holder.
WHEREAS, the parties desire to make appropriate provision and to establish
a procedure whereby voting rights in Devon shall be exercisable by holders
(other than Devon and its Subsidiaries) from time to time of Exchangeable Shares
by and through the Trustee, which will hold legal title to one share of Devon
Special Voting Stock (the "Devon Special Voting Stock") to which voting rights
attach for the benefit of such holders and whereby the rights to require Devon
to purchase Exchangeable Shares from the holders thereof (other than Devon and
its Subsidiaries) shall be exercisable by such holders from time to time of
Exchangeable Shares by and through the Trustee, which will hold legal title to
such rights for the benefit of such holders.
WHEREAS, these recitals and any statements of fact in this agreement are
made by Devon and Northstar and not by the Trustee.
NOW THEREFORE, in consideration of the respective covenants and agreements
provided in this agreement and for other good and valuable consideration (the
receipt and sufficiency of which are hereby acknowledged), the parties agree as
follows:
ARTICLE 1
DEFINITIONS AND INTERPRETATION
1.1 DEFINITIONS.
In this agreement, the following terms shall have the following meanings:
"Aggregate Equivalent Vote Amount" means, with respect to any matter,
proposition or question on which holders of Devon Common Stock are entitled to
vote, consent or otherwise act, the product of (i) the
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number of shares of Exchangeable Shares issued and outstanding and held by
Holders multiplied by (ii) the Equivalent Vote Amount.
"Arrangement" has the meaning provided in the recitals hereto.
"Automatic Exchange Rights" means the benefit of the obligation of Devon to
effect the automatic exchange of shares of Devon Common Stock for Exchangeable
Shares pursuant to Section 5.12 hereof.
"Board of Directors" means the Board of Directors of Northstar.
"Business Day" has the meaning provided in the Exchangeable Share
Provisions.
"Devon Common Stock" has the meaning provided in the Exchangeable Share
Provisions.
"Devon Consent" has the meaning provided in Section 4.2 hereof.
"Devon Meeting" has the meaning provided in Section 4.2 hereof.
"Devon Special Voting Stock" has the meaning provided in the recitals
hereto.
"Devon Successor" has the meaning provided in subsection 11.1(a) hereof.
"Equivalent Vote Amount" means, with respect any matter, proposition or
question on which holders of Devon Common Stock are entitled to vote, consent or
otherwise act, the number of votes to which a holder of one share of Devon
Common Stock is entitled with respect to such matter, proposition or question.
"Exchange Put Right" has the meaning provided in the Exchangeable Share
Provisions.
"Exchange Right" has the meaning provided in Article 5 hereof.
"Exchangeable Share Consideration" has the meaning provided in the
Exchangeable Share Provisions.
"Exchangeable Share Price" has the meaning provided in the Exchangeable
Share Provisions.
"Exchangeable Share Provisions" has the meaning provided in the recitals
hereto.
"Exchangeable Shares" has the meaning provided in the recitals hereto.
"Holder Votes" has the meaning provided in Section 4.2 hereof.
"Holders" means the registered holders from time to time of Exchangeable
Shares, other than Devon and its Subsidiaries.
"Insolvency Event" means the institution by Northstar of any proceeding to
be adjudicated a bankrupt or insolvent or to be dissolved or wound-up, or the
consent of Northstar to the institution of bankruptcy, insolvency, dissolution
or winding-up proceedings against it, or the filing of a petition, answer or
consent seeking dissolution or winding-up under any bankruptcy, insolvency or
analogous laws, including without limitation the Companies Creditors Arrangement
Act (Canada) and the Bankruptcy and Insolvency Act (Canada), and the failure by
Northstar to contest in good faith any such proceedings commenced in respect of
Northstar within 15 days of becoming aware thereof, or the consent by Northstar
to the filing of any such petition or to the appointment of a receiver, or the
making by Northstar of a general assignment for the benefit of creditors, or the
admission in writing by Northstar of its inability to pay its debts generally as
they become due, or Northstar's not being permitted, pursuant to liquidity or
solvency requirements of applicable law, to redeem any Retracted Shares pursuant
to Section 6.6 of the Exchangeable Share Provisions.
"Liquidation Call Right" has the meaning provided in the Exchangeable Share
Provisions.
"Liquidation Event" has the meaning provided in subsection 5.12(b) hereof.
"Liquidation Event Effective Time" has the meaning provided in subsection
5.12(c) hereof.
"List" has the meaning provided in Section 4.6 hereof.
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"Officer's Certificate" means, with respect to Devon or Northstar, as the
case may be, a certificate signed by any one of the Chairman of the Board, the
Vice-Chairman of the Board (if there be one), the President or any
Vice-President of Devon or Northstar, as the case may be.
"Person" includes an individual, body corporate, partnership, company,
unincorporated syndicate or organization, trust, trustee, executor,
administrator and other legal representative.
"Plan of Arrangement" has the meaning provided in the Exchangeable Share
Provisions.
"Redemption Call Right" has the meaning provided in the Exchangeable Share
Provisions.
"Retracted Shares" has the meaning provided in Section 5.7 hereof.
"Retraction Call Right" has the meaning provided in the Exchangeable Share
Provisions.
"Subsidiary" has the meaning provided in the Exchangeable Share Provisions.
"Support Agreement" means that certain support agreement made as of even
date hereof by and between Devon and Northstar.
"Trust" means the trust created by this agreement.
"Trust Estate" means the Voting Share, any other securities, the Exchange
Put Right, the Exchange Right, the Automatic Exchange Rights and any money or
other property which may be held by the Trustee from time to time pursuant to
this agreement.
"Trustee" means -- Trust Company and, subject to the provisions of Article
10 hereof, includes any successor trustee or permitted assigns.
"Voting Rights" means the voting rights attached to the Voting Share.
"Voting Share" means the one share of Devon Special Voting Stock, U.S.
$0.10 par value, issued by Devon to and deposited with the Trustee, which
entitles the holder of record to a number of votes at meetings of holders of
Devon Common Stock equal to the Aggregate Equivalent Vote Amount.
1.2 INTERPRETATION NOT AFFECTED BY HEADINGS, ETC.
The division of this agreement into articles, sections and paragraphs and
the insertion of headings are for convenience of reference only and shall not
affect the construction or interpretation of this agreement.
1.3 NUMBER, GENDER, ETC.
Words importing the singular number only shall include the plural and vice
versa. Words importing the use of any gender shall include all genders.
1.4 DATE FOR ANY ACTION
If any date on which any action is required to be taken under this
agreement is not a Business Day, such action shall be required to be taken on
the next succeeding Business Day.
ARTICLE 2
PURPOSE OF AGREEMENT
The purpose of this agreement is to create the Trust for the benefit of the
Holders, as herein provided. The Trustee will hold the Voting Share in order to
enable the Trustee to exercise the Voting Rights and will hold the Exchange Put
Right, the Exchange Right and the Automatic Exchange Rights in order to enable
the Trustee to exercise such rights, in each case as trustee for and on behalf
of the Holders as provided in this agreement.
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ARTICLE 3
VOTING SHARE
3.1 ISSUANCE AND OWNERSHIP OF THE VOTING SHARE
Devon hereby issues to and deposits with the Trustee the Voting Share to be
hereafter held of record by the Trustee as trustee for and on behalf of, and for
the use and benefit of, the Holders and in accordance with the provisions of
this agreement. Devon hereby acknowledges receipt from the Trustee as trustee
for and on behalf of the Holders of good and valuable consideration (and the
adequacy thereof) for the issuance of the Voting Share by Devon to the Trustee.
During the term of the Trust and subject to the terms and conditions of this
agreement, the Trustee shall possess and be vested with full legal ownership of
the Voting Share and shall be entitled to exercise all of the rights and powers
of an owner with respect to the Voting Share, provided that the Trustee shall:
(a) hold the Voting Share and the legal title thereto as trustee
solely for the use and benefit of the Holders in accordance with the
provisions of this agreement; and
(b) except as specifically authorized by this agreement, have no power
or authority to sell, transfer, vote or otherwise deal in or with the
Voting Share, and the Voting Share shall not be used or disposed of by the
Trustee for any purpose other than the purposes for which this Trust is
created pursuant to this agreement.
3.2 LEGENDED SHARE CERTIFICATES
Northstar will cause each certificate representing Exchangeable Shares to
bear an appropriate legend notifying the Holders of their right to instruct the
Trustee with respect to the exercise of the Voting Rights with respect to the
Exchangeable Shares held by a Holder.
3.3 SAFE KEEPING OF CERTIFICATE
The certificate representing the Voting Share shall at all times be held in
safe keeping by the Trustee or its agent.
ARTICLE 4
EXERCISE OF VOTING RIGHTS
4.1 VOTING RIGHTS
The Trustee, as the holder of record of the Voting Share, shall be entitled
to all of the Voting Rights, including the right to consent to or to vote in
person or by proxy the Voting Share, on any matter, question or proposition
whatsoever that may properly come before the stockholders of Devon at a Devon
Meeting or in connection with a Devon Consent (in each case, as hereinafter
defined). The Voting Rights shall be and remain vested in and exercised by the
Trustee. Subject to Section 7.15 hereof, the Trustee shall exercise the Voting
Rights only on the basis of instructions received pursuant to this Article 4
from Holders entitled to instruct the Trustee as to the voting thereof at the
time at which a Devon Consent is sought or a Devon Meeting is held. To the
extent that no instructions are received from a Holder with respect to the
Voting Rights to which such Holder is entitled, the Trustee shall not exercise
or permit the exercise of such Holder s Voting Rights.
4.2 NUMBER OF VOTES
With respect to all meetings of stockholders of Devon at which holders of
shares of Devon Common Stock are entitled to vote (a "Devon Meeting") and with
respect to all written consents sought by Devon from its stockholders including
the holders of shares of Devon Common Stock (a "Devon Consent"), each Holder
shall be entitled to instruct the Trustee to cast and exercise, in the manner
instructed, a number of votes equal
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to the Equivalent Vote Amount for each Exchangeable Share owned of record by
such Holder on the record date established by Devon or by applicable law for
such Devon Meeting or Devon Consent, as the case may be, (the "Holder Votes") in
respect of each matter, question or proposition to be voted on at such Devon
Meeting or to be consented to in connection with such Devon Consent.
4.3 MAILINGS TO SHAREHOLDERS
With respect to each Devon Meeting and Devon Consent, the Trustee will mail
or cause to be mailed (or otherwise communicate in the same manner as Devon
utilizes in communications to holders of Devon Common Stock, subject to the
Trustee's ability to provide this method of communication and upon being advised
in writing of such method) to each of the Holders named in the List on the same
day as the initial mailing or notice (or other communication) with respect
thereto is given by Devon to its stockholders:
(a) a copy of such notice, together with any proxy or information
statement and related materials to be provided to stockholders of Devon;
(b) a statement that such Holder is entitled to instruct the Trustee
as to the exercise of the Holder Votes with respect to such Devon Meeting
or Devon Consent, as the case may be, or, pursuant to Section 4.7 hereof,
to attend such Devon Meeting and to exercise personally the Holder Votes
thereat;
(c) a statement as to the manner in which such instructions may be
given to the Trustee, including an express indication that instructions may
be given to the Trustee to give:
(i) a proxy to such Holder or such Holder's designee to exercise
personally the Holder Votes; or
(ii) a proxy to a designated agent or other representative of the
management of Devon to exercise such Holder Votes;
(d) a statement that if no such instructions are received from the
Holder, the Holder Votes to which such Holder is entitled will not be
exercised;
(e) a form of direction whereby the Holder may so direct and instruct
the Trustee as contemplated herein; and
(f) a statement of (i) the time and date by which such instructions
must be received by the Trustee in order to be binding upon it, which in
the case of a Devon Meeting shall not be earlier than the close of business
on the Business Day prior to such meeting, and (ii) the method for revoking
or amending such instructions.
The materials referred to above are to be provided by Devon to the Trustee,
but shall be subject to review and comment by the Trustee.
For the purpose of determining Holder Votes to which a Holder is entitled
in respect of any such Devon Meeting or Devon Consent, the number of
Exchangeable Shares owned of record by the Holder shall be determined at the
close of business on the record date established by Devon or by applicable law
for purposes of determining stockholders entitled to vote at such Devon Meeting
or to give written consent in connection with such Devon Consent. Devon will
notify the Trustee in writing of any decision of the board of directors of Devon
with respect to the calling of any such Devon Meeting or the seeking of any such
Devon Consent and shall provide all necessary information and materials to the
Trustee in each case promptly and in any event in sufficient time to enable the
Trustee to perform its obligations contemplated by this Section 4.3.
4.4 COPIES OF STOCKHOLDER INFORMATION
Devon will deliver to the Trustee copies of all proxy materials, (including
notices of Devon Meetings, but excluding proxies to vote shares of Devon Common
Stock), information statements, reports (including without limitation all
interim and annual financial statements) and other written communications that
are to be distributed from time to time to holders of Devon Common Stock in
sufficient quantities and in sufficient time so as to enable the Trustee to send
those materials to each Holder at the same time as such materials are
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first sent to holders of Devon Common Stock. The Trustee will mail or otherwise
send to each Holder, at the expense of Devon, copies of all such materials (and
all materials specifically directed to the Holders or to the Trustee for the
benefit of the Holders by Devon) received by the Trustee from Devon at the same
time as such materials are first sent to holders of Devon Common Stock. The
Trustee will make copies of all such materials available for inspection by any
Holder at the Trustee s principal transfer office in the cities of Calgary and
Toronto.
4.5 OTHER MATERIALS
Immediately after receipt by Devon or any stockholder of Devon of any
material sent or given generally to the holders of Devon Common Stock by or on
behalf of a third party, including without limitation dissident proxy and
information circulars (and related information and material) and tender and
exchange offer circulars (and related information and material), Devon shall use
its best efforts to obtain and deliver to the Trustee copies thereof in
sufficient quantities so as to enable the Trustee to forward such material
(unless the same has been provided directly to Holders by such third party) to
each Holder as soon as possible thereafter. As soon as practicable after receipt
thereof, the Trustee will mail or otherwise send to each Holder, at the expense
of Devon, copies of all such materials received by the Trustee from Devon. The
Trustee will also make copies of all such materials available for inspection by
any Holder at the Trustee s principal transfer office in the cities of Calgary
and Toronto.
4.6 LIST OF PERSONS ENTITLED TO VOTE
Northstar shall, (i) prior to each annual, general or special Devon Meeting
or the seeking of any Devon Consent and (ii) forthwith upon each request made at
any time by the Trustee in writing, prepare or cause to be prepared a list (a
"List") of the names and addresses of the Holders arranged in alphabetical order
and showing the number of Exchangeable Shares held of record by each such
Holder, in each case at the close of business on the date specified by the
Trustee in such request or, in the case of a List prepared in connection with a
Devon Meeting or a Devon Consent, at the close of business on the record date
established by Devon or pursuant to applicable law for determining the holders
of Devon Common Stock entitled to receive notice of and/or to vote at such Devon
Meeting or to give consent in connection with such Devon Consent. Each such List
shall be delivered to the Trustee promptly after receipt by Northstar of such
request or the record date for such meeting or seeking of consent, as the case
may be, and in any event within sufficient time as to enable the Trustee to
perform its obligations under this agreement. Devon agrees to give Northstar
written notice (with a copy to the Trustee) of the calling of any Devon Meeting
or the seeking of any Devon Consent, together with the record dates therefor,
sufficiently prior to the date of the calling of such meeting or seeking of such
consent so as to enable Northstar to perform its obligations under this Section
4.6.
4.7 ENTITLEMENT TO DIRECT VOTES
Any Holder named in a List prepared in connection with any Devon Meeting or
any Devon Consent will be entitled (i) to instruct the Trustee in the manner
described in Section 4.3 hereof with respect to the exercise of the Holder Votes
to which such Holder is entitled or (ii) to attend such meeting and personally
to exercise thereat (or to exercise with respect to any written consent), as the
proxy of the Trustee, the Holder Votes to which such Holder is entitled.
4.8 VOTING BY TRUSTEE, AND ATTENDANCE OF TRUSTEE REPRESENTATIVE, AT MEETING.
(a) In connection with each Devon Meeting and Devon Consent, the Trustee
shall exercise, either in person or by proxy, in accordance with the
instructions received from a Holder pursuant to Section 4.3 hereof, the Holder
Votes as to which such Holder is entitled to direct the vote (or any lesser
number thereof as may be set forth in the instructions); provided, however, that
such written instructions are received by the Trustee from the Holder prior to
the time and date fixed by it for receipt of such instructions in the notice
given by the Trustee to the Holder pursuant to Section 4.3 hereof.
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(b) The Trustee shall cause such representatives as are empowered by it to
sign and deliver, on behalf of the Trustee, proxies for Voting Rights to attend
each Devon Meeting. Upon submission by a Holder (or its designee) of
identification satisfactory to the Trustee's representatives, and at the
Holder's request, such representatives shall sign and deliver to such Holder (or
its designee) a proxy to exercise personally the Holder Votes as to which such
Holder is otherwise entitled hereunder to direct the vote, if such Holder
either:
(i) has not previously given the Trustee instructions pursuant to
Section 4.3 hereof in respect of such meeting, or
(ii) submits to the Trustee s representatives written revocation of
any such previous instructions.
At such meeting, the Holder exercising such Holder Votes shall have the
same rights as the Trustee to speak at the meeting in respect of any matter,
question or proposition, to vote by way of ballot at the meeting in respect of
any matter, question or proposition and to vote at such meeting by way of a show
of hands in respect of any matter, question or proposition.
4.9 DISTRIBUTION OF WRITTEN MATERIALS
Any written materials to be distributed by the Trustee to the Holders
pursuant to this agreement shall be delivered or sent by mail (or otherwise
communicated in the same manner as Devon utilizes in communications to holders
of Devon Common Stock) to each Holder at its address as shown on the books of
Northstar. Northstar shall provide or cause to be provided to the Trustee for
this purpose, on a timely basis and without charge or other expense:
(a) current lists of the Holders; and
(b) on the request of the Trustee, mailing labels to enable the
Trustee to carry out its duties under this agreement.
The materials referred to above are to be provided by Northstar to the
Trustee, but shall be subject to review and comment by the Trustee.
4.10 TERMINATION OF VOTING RIGHTS
Except as otherwise provided herein or in the Exchangeable Share
Provisions, all of the rights of a Holder with respect to the Holder Votes
exercisable in respect of the Exchangeable Shares held by such Holder, including
the right to instruct the Trustee as to the voting of or to vote personally such
Holder Votes, shall be deemed to be surrendered by the Holder to Devon, and such
Holder Votes and the Voting Rights represented thereby shall cease immediately,
upon the delivery by such Holder to the Trustee of the certificates representing
such Exchangeable Shares in connection with the exercise by the Holder of the
Exchange Put Right or the Exchange Right or the occurrence of the automatic
exchange of Exchangeable Shares for shares of Devon Common Stock, as specified
in Article 5 hereof (unless in any case Devon shall not have delivered the
Exchangeable Share Consideration deliverable in exchange therefor to the Trustee
for delivery to the Holders), or upon the redemption of Exchangeable Shares
pursuant to Article 6 or Article 7 of the Exchangeable Share Provisions, or upon
the effective date of the liquidation, dissolution or winding-up of Northstar or
any other distribution of the assets of Northstar among its shareholders for the
purpose of winding up its affairs pursuant to Article 5 of the Exchangeable
Share Provisions, or upon the purchase of Exchangeable Shares from the holder
thereof by Devon pursuant to the exercise by Devon of the Retraction Call Right,
the Redemption Call Right or the Liquidation Call Right.
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ARTICLE 5
EXCHANGE RIGHT AND AUTOMATIC EXCHANGE
5.1 GRANT AND OWNERSHIP OF THE EXCHANGE PUT RIGHT, EXCHANGE RIGHT AND AUTOMATIC
EXCHANGE RIGHT
Devon hereby grants to the Trustee as trustee for and on behalf of, and for
the use and benefit of, the Holders:
(a) the Exchange Put Right;
(b) the right (the "Exchange Right"), upon the occurrence and during
the continuance of an Insolvency Event, to require Devon to purchase from
each or any Holder all or any part of the Exchangeable Shares held by the
Holders; and
(c) the Automatic Exchange Rights,
all in accordance with the provisions of this agreement and the Exchangeable
Share Provisions, as the case may be. Devon hereby acknowledges receipt from the
Trustee as trustee for and on behalf of the Holders of good and valuable
consideration (and the adequacy thereof) for the grant of the Exchange Put
Right, the Exchange Right and the Automatic Exchange Rights by Devon to the
Trustee. During the term of the Trust and subject to the terms and conditions of
this agreement, the Trustee shall possess and be vested with full legal
ownership of the Exchange Put Right, the Exchange Right and the Automatic
Exchange Rights and shall be entitled to exercise all of the rights and powers
of an owner with respect to the Exchange Put Right, the Exchange Right and the
Automatic Exchange Rights, provided that the Trustee shall:
(d) hold the Exchange Put Right, the Exchange Right and the Automatic
Exchange Rights and the legal title thereto as trustee solely for the use
and benefit of the Holders in accordance with the provisions of this
agreement; and
(e) except as specifically authorized by this agreement, have no power
or authority to exercise or otherwise deal in or with the Exchange Put
Right, the Exchange Right or the Automatic Exchange Rights, and the Trustee
shall not exercise any such rights for any purpose other than the purposes
for which this Trust is created pursuant to this agreement.
5.2 LEGENDED SHARE CERTIFICATES
Northstar will cause each certificate representing Exchangeable Shares to
bear an appropriate legend notifying the Holders of:
(a) their right to instruct the Trustee with respect to the exercise
of the Exchange Put Right and the Exchange Right in respect of the
Exchangeable Shares held by a Holder; and
(b) the Automatic Exchange Rights.
5.3 GENERAL EXERCISE OF EXCHANGE PUT RIGHT AND EXCHANGE RIGHT
The Exchange Put Right and the Exchange Right shall be and remain vested in
and exercised by the Trustee. Subject to Section 7.15 hereof, the Trustee shall
exercise the Exchange Put Right and the Exchange Right only on the basis of
instructions received pursuant to this Article 5 from Holders entitled to
instruct the Trustee as to the exercise thereof. To the extent that no
instructions are received from a Holder with respect to the Exchange Put Right
and the Exchange Right, the Trustee shall not exercise or permit the exercise of
the Exchange Put Right and the Exchange Right.
5.4 PURCHASE PRICE
The purchase price payable by Devon for each Exchangeable Share to be
purchased by Devon (i) under the Exchange Put Right shall be the amount
determined under the Exchangeable Share Provisions, and
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(ii) under the Exchange Right shall be an amount equal to the Exchangeable Share
Price on the last Business Day prior to the day of closing of the purchase and
sale of such Exchangeable Share under the Exchange Right. In connection with
each exercise of the Exchange Right, Devon will provide to the Trustee an
Officer s Certificate setting forth the calculation of the applicable
Exchangeable Share Price for each Exchangeable Share. The applicable
Exchangeable Share Price for each such Exchangeable Share so purchased may be
satisfied only by Devon's issuing and delivering or causing to be delivered to
the Trustee, on behalf of the relevant Holder, the applicable Exchangeable Share
Consideration representing the total applicable Exchangeable Share Price.
5.5 EXERCISE INSTRUCTIONS FOR EXCHANGE RIGHT
Subject to the terms and conditions herein set forth, a Holder shall be
entitled, upon the occurrence and during the continuance of an Insolvency Event,
to instruct the Trustee to exercise the Exchange Right with respect to all or
any part of the Exchangeable Shares registered in the name of such Holder on the
books of Northstar. To cause the exercise of the Exchange Right by the Trustee,
the Holder shall deliver to the Trustee, in person or by certified or registered
mail, at its principal transfer offices in Calgary, Alberta and Toronto, Ontario
or at such other places in Canada as the Trustee may from time to time designate
by written notice to the Holders, the certificates representing the Exchangeable
Shares which such Holder desires Devon to purchase, duly endorsed in blank, and
accompanied by such other documents and instruments as may be required to effect
a transfer of Exchangeable Shares under applicable law and the by-laws of
Northstar and such additional documents and instruments as the Trustee may
reasonably require, together with:
(a) a duly completed form of notice of exercise of the Exchange Right,
contained on the reverse of or attached to the Exchangeable Share
certificates, stating:
(i) that the Holder thereby instructs the Trustee to exercise the
Exchange Right so as to require Devon to purchase from the Holder the
number of Exchangeable Shares specified therein,
(ii) that such Holder has good title to and owns all such
Exchangeable Shares to be acquired by Devon free and clear of all liens,
claims, encumbrances, security interests and adverse claims or
interests,
(iii) the names in which the certificates representing Devon
Common Stock issuable in connection with the exercise of the Exchange
Right are to be issued, and
(iv) the names and addresses of the persons to whom the
Exchangeable Share Consideration should be delivered; and
(b) payment (or evidence satisfactory to the Trustee, Northstar and
Devon of payment) of the taxes (if any) payable as contemplated by Section
5.8 of this agreement.
If only a part of the Exchangeable Shares represented by any certificate or
certificates delivered to the Trustee are to be purchased by Devon under the
Exchange Right, a new certificate for the balance of such Exchangeable Shares
shall be issued to the Holder at the expense of Northstar.
5.6 DELIVERY OF EXCHANGEABLE SHARE CONSIDERATION; EFFECT OF EXERCISE
Promptly after receipt of the certificates representing the Exchangeable
Shares which the Holder desires Devon to purchase under the Exchange Put Right
or the Exchange Right (together with such documents and instruments of transfer
and a duly completed form of notice of exercise of the Exchange Put Right or the
Exchange Right), duly endorsed for transfer to Devon, the Trustee shall notify
Devon and Northstar of its receipt of the same, which notice to Devon and
Northstar shall constitute exercise of the Exchange Put Right or the Exchange
Right by the Trustee on behalf of the Holder of such Exchangeable Shares, and
Devon shall immediately thereafter deliver or cause to be delivered to the
Trustee, for delivery to the Holder of such Exchangeable Shares (or to such
other persons, if any, properly designated by such Holder), the Exchangeable
Share Consideration deliverable in connection with the exercise of the Exchange
Put Right or the Exchange Right; provided, however, that no such delivery shall
be made unless and until the Holder
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requesting the same shall have paid (or provided evidence satisfactory to the
Trustee, Northstar and Devon of the payment of) the taxes (if any) payable as
contemplated by Section 5.8 of this agreement. Immediately upon the giving of
notice by the Trustee to Devon and Northstar of the exercise of the Exchange Put
Right or the Exchange Right, as provided in this Section 5.6, (i) the closing of
the transaction of purchase and sale contemplated by the Exchange Put Right or
the Exchange Right shall be deemed to have occurred, (ii) Devon shall be
required to take all action necessary to permit it to occur, including delivery
to the Trustee of the relevant Exchangeable Share Consideration, no later than
the close of business on the third Business Day following the receipt by the
Trustee of notice, certificates and other documents as aforesaid and (iii) the
Holder of such Exchangeable Shares shall be deemed to have transferred to Devon
all of its right, title and interest in and to such Exchangeable Shares and the
related interest in the Trust Estate, shall cease to be a holder of such
Exchangeable Shares and shall not be entitled to exercise any of the rights of a
holder in respect thereof, other than the right to receive his proportionate
part of the total purchase price therefor, unless such Exchangeable Share
Consideration is not delivered by Devon to the Trustee by the date specified
above, in which case the rights of the Holder shall remain unaffected until such
Exchangeable Share Consideration is delivered by Devon and any cheque included
therein is paid. Concurrently with such Holder ceasing to be a holder of
Exchangeable Shares, the Holder shall be considered and deemed for all purposes
to be the holder of the shares of Devon Common Stock delivered to it pursuant to
the Exchange Put Right or the Exchange Right. Notwithstanding the foregoing,
until the Exchangeable Share Consideration is delivered to the Holder, the
Holder shall be deemed to still be a holder of the sold Exchangeable Shares for
purposes of voting rights with respect thereto under this agreement.
5.7 EXERCISE OF EXCHANGE RIGHT SUBSEQUENT TO RETRACTION
In the event that a Holder has exercised its right under Article 6 of the
Exchangeable Share Provisions to require Northstar to redeem any or all of the
Exchangeable Shares held by the Holder (the "Retracted Shares") and is notified
by Northstar pursuant to Section 6.6 of the Exchangeable Share Provisions that
Northstar will not be permitted as a result of liquidity or solvency provisions
of applicable law to redeem all such Retracted Shares, subject to receipt by the
Trustee of written notice to that effect from Northstar and provided that Devon
shall not have exercised the Retraction Call Right with respect to the Retracted
Shares and that the Holder has not revoked the retraction request delivered by
the Holder to Northstar pursuant to Section 6.1 of the Exchangeable Share
Provisions, the retraction request will constitute and will be deemed to
constitute notice from the Holder to the Trustee instructing the Trustee to
exercise the Exchange Right with respect to those Retracted Shares which
Northstar is unable to redeem. In any such event, Northstar hereby agrees with
the Trustee and in favour of the Holder immediately to notify the Trustee of
such prohibition against Northstar's redeeming all of the Retracted Shares and
immediately to forward or cause to be forwarded to the Trustee all relevant
materials delivered by the Holder to Northstar or to the transfer agent of the
Exchangeable Shares (including without limitation a copy of the retraction
request delivered pursuant to Section 6.1 of the Exchangeable Share Provisions)
in connection with such proposed redemption of the Retracted Shares, and the
Trustee will thereupon exercise the Exchange Right with respect to the Retracted
Shares which Northstar is not permitted to redeem and will require Devon to
purchase such shares in accordance with the provisions of this Article 5.
5.8 STAMP OR OTHER TRANSFER TAXES
Upon any sale of Exchangeable Shares to Devon pursuant to the Exchange Put
Right, the Exchange Right or the Automatic Exchange Rights, the share
certificate or certificates representing Devon Common Stock to be delivered as
Exchangeable Share Consideration in connection with the payment of the total
purchase price therefor shall be issued in the name of the Holder of the
Exchangeable Shares so sold or in such names as such Holder may otherwise direct
in writing without charge to the holder of the Exchangeable Shares so sold,
provided, however, that such Holder:
(a) shall pay (and neither Devon, Northstar nor the Trustee shall be
required to pay) any documentary, stamp, transfer or other similar taxes
that may be payable in respect of any transfer involved in the issuance or
delivery of such shares to a person other than such Holder; or
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(b) shall have established to the satisfaction of the Trustee, Devon
and Northstar that such taxes, if any, have been paid.
5.9 NOTICE OF INSOLVENCY EVENT
Immediately upon the occurrence of an Insolvency Event or any event which
with the giving of notice or the passage of time or both would be an Insolvency
Event, Northstar and Devon shall give written notice thereof to the Trustee. As
soon as practicable after receiving notice from Northstar or Devon of the
occurrence of an Insolvency Event, the Trustee will mail to each Holder, at the
expense of Devon, a notice of such Insolvency Event in the form provided by
Devon, which notice shall contain a brief statement of the right of the Holders
with respect to the Exchange Right.
5.10 QUALIFICATION OF DEVON COMMON STOCK
Devon covenants that if any shares of Devon Common Stock to be issued and
delivered pursuant to the Exchange Put Right, the Exchange Right or the
Automatic Exchange Rights require registration or qualification with or approval
of or the filing of any document including any prospectus or similar document,
the taking of any proceeding with or the obtaining of any order, ruling or
consent from any governmental or regulatory authority under any Canadian or
United States federal, provincial or state law or regulation or pursuant to the
rules and regulations of any regulatory authority, or the fulfillment of any
other legal requirement (collectively, the "Applicable Laws") before such shares
may be issued and delivered by Devon to the initial holder thereof (other than
Northstar) or in order that such shares may be freely traded thereafter (other
than any restrictions on transfer by reason of a holder being a "control person"
of Devon for purposes of Canadian federal or provincial securities law or an
"affiliate" of Devon for purposes of United States federal or state securities
law), Devon will in good faith expeditiously take all such actions and do all
such things as are necessary to cause such shares of Devon Common Stock to be
and remain duly registered, qualified or approved. Devon represents and warrants
that it has in good faith taken all actions and done all things as are necessary
under Applicable Laws as they exist on the date hereof to cause the shares of
Devon Common Stock to be issued and delivered pursuant to the Exchange Put
Right, the Exchange Right and the Automatic Exchange Rights and to be freely
tradeable thereafter (other than restrictions on transfer by reason of a holder
being a "control person" of Devon for the purposes of Canadian federal and
provincial securities law or an "affiliate" of Devon for the purposes of United
States federal or state securities law). Devon will in good faith expeditiously
take all such actions and do all such things as are necessary to cause all
shares of Devon Common Stock to be delivered pursuant to the Exchange Put Right,
the Exchange Right or the Automatic Exchange Rights to be listed, quoted or
posted for trading on all stock exchanges and quotation systems on which such
shares are listed, quoted or posted for trading at such time.
5.11 RESERVATION OF SHARES OF DEVON COMMON STOCK
Devon hereby represents, warrants and covenants that it has irrevocably
reserved for issuance and will at all times keep available, free from
pre-emptive and other rights, out of its authorized and unissued capital stock
such number of shares of Devon Common Stock:
(a) as is equal to the sum of
(i) the number of Exchangeable Shares issued and outstanding from
time to time, and
(ii) the number of Exchangeable Shares issuable upon the exercise
of all rights to acquire Exchangeable Shares outstanding from time to
time; and
(b) as are now and may hereafter be required to enable and permit
Northstar to meet its obligations hereunder, under the Amended and Restated
Certificate of Incorporation of Devon, under the Support Agreement, under
the Exchangeable Share Provisions and under any other security or
commitment pursuant to the Arrangement with respect to which Devon may now
or hereafter be required to issue shares of Devon Common Stock.
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5.12 AUTOMATIC EXCHANGE ON LIQUIDATION OF DEVON
(a) Devon will give the Trustee written notice of each of the following
events at the time set forth below:
(i) in the event of any determination by the board of directors of
Devon to institute voluntary liquidation, dissolution or winding-up
proceedings with respect to Devon or to effect any other distribution of
assets of Devon among its stockholders for the purpose of winding-up its
affairs, at least 60 days prior to the proposed effective date of such
liquidation, dissolution, winding-up or other distribution; and
(ii) immediately, upon the earlier of
(A) receipt by Devon of notice of, and
(B) Devon's otherwise becoming aware of any threatened or
instituted claim, suit, petition or other proceedings with respect to
the involuntary liquidation, dissolution or winding-up of Devon or to
effect any other distribution of assets of Devon among its stockholders
for the purpose of winding-up its affairs.
(b) Immediately following receipt by the Trustee from Devon of notice of
any event (a "Liquidation Event") contemplated by Section 5.12(a) above, the
Trustee will give notice thereof to the Holders. Such notice will be provided by
Devon to the Trustee and shall include a brief description of the automatic
exchange of Exchangeable Shares for shares of Devon Common Stock provided for in
Section 5.12(c) below.
(c) In order that the Holders will be able to participate on a pro rata
basis with the holders of Devon Common Stock in the distribution of assets of
Devon in connection with a Liquidation Event, immediately prior to the effective
time (the "Liquidation Event Effective Time") of a Liquidation Event, all of the
then outstanding Exchangeable Shares shall be automatically exchanged for shares
of Devon Common Stock. To effect such automatic exchange, Devon shall be deemed
to have purchased each Exchangeable Share outstanding immediately prior to the
Liquidation Event Effective Time and held by Holders, and each Holder shall be
deemed to have sold the Exchangeable Shares held by it at such time, for a
purchase price per share equal to the Exchangeable Share Price applicable at
such time. In connection with such automatic exchange, Devon will provide to the
Trustee an Officer's Certificate setting forth the calculation of the purchase
price for each Exchangeable Share.
(d) The closing of the transaction of purchase and sale contemplated by
Section 5.12(c) above shall be deemed to have occurred immediately prior to the
Liquidation Event Effective Time, and each Holder of Exchangeable Shares shall
be deemed to have transferred to Devon all of the Holder's right, title and
interest in and to such Exchangeable Shares and the related interest in the
Trust Estate and shall cease to be a holder of such Exchangeable Shares, and
Devon shall deliver to the Holder the Exchangeable Share Consideration
deliverable upon the automatic exchange of Exchangeable Shares. Concurrently
with such Holder's ceasing to be a holder of Exchangeable Shares, the Holder
shall be considered and deemed for all purposes to be the holder of the shares
of Devon Common Stock issued to it pursuant to the automatic exchange of
Exchangeable Shares for Devon Common Stock, and the certificates held by the
Holder previously representing the Exchangeable Shares exchanged by the Holder
with Devon pursuant to such automatic exchange shall thereafter be deemed to
represent the shares of Devon Common Stock issued to the Holder by Devon
pursuant to such automatic exchange. Upon the request of a Holder and the
surrender by the Holder of Exchangeable Share certificates deemed to represent
shares of Devon Common Stock, duly endorsed in blank and accompanied by such
instruments of transfer as Devon may reasonably require, Devon shall deliver or
cause to be delivered to the Holder certificates representing the shares of
Devon Common Stock of which the Holder is the holder. Notwithstanding the
foregoing, until each Holder is actually entered on the register of holders of
Devon Common Stock, such Holder shall be deemed to still be a holder of the
transferred Exchangeable Shares for purposes of all voting rights with respect
thereto under this agreement.
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ARTICLE 6
RESTRICTIONS ON ISSUANCE OF DEVON SPECIAL VOTING STOCK
During the term of this agreement, Devon will not issue any shares of Devon
Special Voting Stock in addition to the Voting Share.
ARTICLE 7
CONCERNING THE TRUSTEE
7.1 POWERS AND DUTIES OF THE TRUSTEE
The rights, powers and authorities of the Trustee under this agreement, in
its capacity as trustee of the Trust, shall include:
(a) receipt and deposit of the Voting Share from Devon as trustee for
and on behalf of the Holders in accordance with the provisions of this
agreement;
(b) granting proxies and distributing materials to Holders as provided
in this agreement;
(c) voting the Holder Votes in accordance with the provisions of this
agreement;
(d) receiving the grant of the Exchange Put Right, the Exchange Right
and the Automatic Exchange Rights from Devon as trustee for and on behalf
of the Holders in accordance with the provisions of this agreement;
(e) exercising the Exchange Put Right and the Exchange Right and
enforcing the benefit of the Automatic Exchange Rights, in each case in
accordance with the provisions of this agreement, and in connection
therewith receiving from Holders Exchangeable Shares and other requisite
documents and distributing to such Holders the shares of Devon Common Stock
and cheques, if any, to which such Holders are entitled upon the exercise
of the Exchange Put Right and the Exchange Right or pursuant to the
Automatic Exchange Rights, as the case may be;
(f) holding title to the Trust Estate;
(g) investing any moneys forming, from time to time, a part of the
Trust Estate as provided in this agreement;
(h) taking action at the direction of a Holder or Holders to enforce
the obligations of Devon under this agreement; and
(i) taking such other actions and doing such other things as are
specifically provided in this agreement.
In the exercise of such rights, powers and authorities, the Trustee shall
have (and is granted) such incidental and additional rights, powers and
authority not in conflict with any of the provisions of this agreement as the
Trustee, acting in good faith and in the reasonable exercise of its discretion,
may deem necessary, appropriate or desirable to effect the purpose of the Trust.
Any exercise of such discretionary rights, powers and authorities by the Trustee
shall be final, conclusive and binding upon all persons. For greater certainty,
the Trustee shall have only those duties as are set out specifically in this
agreement. The Trustee in exercising its rights, powers, duties and authorities
hereunder shall act honestly and in good faith with a view to the best interests
of the Holders and shall exercise the care, diligence and skill that a
reasonably prudent trustee would exercise in comparable circumstances. The
Trustee shall not be bound to give any notice or do or take any act, action or
proceeding by virtue of the powers conferred on it hereby unless and until it
shall be specifically required to do so under the terms hereof nor shall the
Trustee be required to take any notice of, or to do or to take any act, action
or proceeding as a result of any default or breach of any provision hereunder,
unless and until notified in writing of such default or breach, which notices
shall distinctly specify the default or breach desired to be brought to the
attention of the Trustee and in the absence of such notice the Trustee
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may for all purposes of this agreement conclusively assume that no default or
breach has been made in the observance or performance of any of the
representations, warranties, covenants, agreements or conditions contained
herein.
7.2 NO CONFLICT OF INTEREST
The Trustee represents to Northstar and Devon that at the date of execution
and delivery of this agreement there exists no material conflict of interest in
the role of the Trustee as a fiduciary hereunder and the role of the Trustee in
any other capacity. The Trustee shall, within 90 days after it becomes aware
that such a material conflict of interest exists, either eliminate such material
conflict of interest or resign in the manner and with the effect specified in
Article 10 hereof. If, notwithstanding the foregoing provisions of this Section
7.2, the Trustee has such a material conflict of interest, the validity and
enforceability of this agreement shall not be affected in any manner whatsoever
by reason only of the existence of such material conflict of interest. If the
Trustee contravenes the foregoing provisions of this Section 7.2, any interested
party may apply to the superior court of the province in which Northstar has its
registered office for an order that the Trustee be replaced as trustee
hereunder.
7.3 DEALINGS WITH TRANSFER AGENTS, REGISTRARS, ETC.
Northstar and Devon irrevocably authorize the Trustee, from time to time,
to:
(a) consult, communicate and otherwise deal with the respective
registrars and transfer agents, and with any such subsequent registrar or
transfer agent, of the Exchangeable Shares and Devon Common Stock; and
(b) requisition, from time to time,
(i) from any such registrar or transfer agent any information
readily available from the records maintained by it which the Trustee
may reasonably require for the discharge of its duties and
responsibilities under this agreement, and
(ii) from the transfer agent of Devon Common Stock, and any
subsequent transfer agent of such shares, to complete the exercise from
time to time of the Exchange Put Right, the Exchange Right and the
Automatic Exchange Rights in the manner specified in Article 5 hereof,
the share certificates issuable upon such exercise.
Northstar and Devon irrevocably authorize their respective registrars and
transfer agents to comply with all such requests. Devon covenants that it will
supply its transfer agent with duly executed share certificates for the purpose
of completing the exercise from time to time of the Exchange Put Right, the
Exchange Right and the Automatic Exchange Rights, in each case pursuant to
Article 5 hereof.
7.4 BOOKS AND RECORDS
The Trustee shall keep available for inspection by Devon and Northstar, at
the Trustee's principal transfer office in Calgary, Alberta, correct and
complete books and records of account relating to the Trustee's actions under
this agreement, including without limitation all information relating to
mailings and instructions to and from Holders and all transactions pursuant to
the Voting Rights, the Exchange Put Right, the Exchange Right and the Automatic
Exchange Rights for the term of this agreement. On or before March 31, 1999, and
on or before March 31 in every year thereafter, so long as the Voting Share is
on deposit with the Trustee, the Trustee shall transmit to Devon and Northstar a
brief report, dated as of the preceding December 31, with respect to:
(a) the property and funds comprising the Trust Estate as of that
date;
(b) the number of exercises of the Exchange Put Right and the Exchange
Right, if any, and the aggregate number of Exchangeable Shares received by
the Trustee on behalf of Holders in consideration of the issue and delivery
by Devon of shares of Devon Common Stock in connection with the Exchange
Put Right and the Exchange Right, during the calendar year ended on such
date; and
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(c) all other actions taken by the Trustee in the performance of its
duties under this agreement which it had not previously reported.
7.5 INCOME TAX RETURNS AND REPORTS
The Trustee shall, to the extent necessary, prepare and file on behalf of
the Trust appropriate United States and Canadian income tax returns and any
other returns or reports as may be required by applicable law or pursuant to the
rules and regulations of any securities exchange or other trading system through
which the Exchangeable Shares are traded and, in connection therewith, may
obtain the advice and assistance of such experts as the Trustee may consider
necessary or advisable. If requested by the Trustee, Devon shall retain such
experts for purposes of providing such advice and assistance.
7.6 INDEMNIFICATION PRIOR TO CERTAIN ACTIONS BY TRUSTEE
The Trustee shall exercise any or all of the rights, duties, powers or
authorities vested in it by this agreement at the request, order or direction of
any Holder upon such Holder's furnishing to the Trustee reasonable funding,
security and indemnity against the costs, expenses and liabilities which may be
incurred by the Trustee therein or thereby; provided that no Holder shall be
obligated to furnish to the Trustee any such funding, security or indemnity in
connection with the exercise by the Trustee of any of its rights, duties, powers
and authorities with respect to the Voting Share pursuant to Article 4 hereof,
subject to Section 7.15 hereof, and with respect to the Exchange Put Right and
the Exchange Right pursuant to Article 5 hereof, subject to Section 7.15 hereof,
and with respect to the Automatic Exchange Rights pursuant to Article 5 hereof.
None of the provisions contained in this agreement shall require the Trustee to
expend or risk its own funds or otherwise incur financial liability in the
exercise of any of its rights, powers, duties or authorities unless funded,
given funds, security and indemnified as aforesaid.
7.7 ACTIONS BY HOLDERS
No Holder shall have the right to institute any action, suit or proceeding
or to exercise any other remedy authorized by this agreement for the purpose of
enforcing any of its rights or for the execution of any trust or power hereunder
unless the Holder has requested the Trustee to take or institute such action,
suit or proceeding and furnished the Trustee with the funding, security and
indemnity referred to in Section 7.6 hereof and the Trustee shall have failed to
act within a reasonable time thereafter. In such case, but not otherwise, the
Holder shall be entitled to take proceedings in any court of competent
jurisdiction such as the Trustee might have taken; it being understood and
intended that no one or more Holders shall have any right in any manner
whatsoever to affect, disturb or prejudice the rights hereby created by any such
action, or to enforce any right hereunder or under the Voting Rights, the
Exchange Put Right, the Exchange Right or the Automatic Exchange Rights, except
subject to the conditions and in the manner herein provided, and that all powers
and trusts hereunder shall be exercised and all proceedings at law shall be
instituted, had and maintained by the Trustee, except only as herein provided,
and in any event for the equal benefit of all Holders.
7.8 RELIANCE UPON DECLARATIONS
The Trustee shall not be considered to be in contravention of any of its
rights, powers, duties and authorities hereunder if, when required, it acts and
relies in good faith upon lists, mailing labels, notices, statutory
declarations, certificates, opinions, reports or other papers or documents
furnished pursuant to the provisions hereof or required by the Trustee to be
furnished to it in the exercise of its rights, powers, duties and authorities
hereunder, and such lists, mailing labels, notices, statutory declarations,
certificates, opinions, reports or other papers or documents comply with the
provisions of Section 7.9 hereof, if applicable, and with any other applicable
provisions of this agreement.
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7.9 EVIDENCE AND AUTHORITY TO TRUSTEE
Northstar and/or Devon shall furnish to the Trustee evidence of compliance
with the conditions provided for in this agreement relating to any action or
step required or permitted to be taken by Northstar and/or Devon or the Trustee
under this agreement or as a result of any obligation imposed under this
agreement, including, without limitation, in respect of the Voting Rights or the
Exchange Put Right, the Exchange Right or the Automatic Exchange Rights and the
taking of any other action to be taken by the Trustee at the request of or on
the application of Northstar and/or Devon forthwith if and when:
(a) such evidence is required by any other section of this agreement
to be furnished to the Trustee in accordance with the terms of this Section
7.9; or
(b) the Trustee, in the exercise of its rights, powers, duties and
authorities under this agreement, gives Northstar and/or Devon written
notice requiring it to furnish such evidence in relation to any particular
action or obligation specified in such notice.
Such evidence shall consist of an Officer's Certificate of Northstar and/or
Devon or a statutory declaration or a certificate made by persons entitled to
sign an Officer's Certificate stating that any such condition has been complied
with in accordance with the terms of this agreement.
Whenever such evidence relates to a matter other than the Voting Rights or
the Exchange Put Right, the Exchange Right or the Automatic Exchange Rights, and
except as otherwise specifically provided herein, such evidence may consist of a
report or opinion of any solicitor, auditor, accountant, appraiser, valuer,
engineer or other expert or any other person whose qualifications give authority
to a statement made by him, provided that, if such report or opinion is
furnished by a director, officer or employee of Northstar and/or Devon, it shall
be in the form of an Officer's Certificate or a statutory declaration.
Each statutory declaration, certificate, opinion or report furnished to the
Trustee as evidence of compliance with a condition provided for in this
agreement shall include a statement by the person giving the evidence:
(i) declaring that such person has read and understands the provisions
of this agreement relating to the condition in question;
(ii) describing the nature and scope of the examination or
investigation upon which such person based the statutory declaration,
certificate, statement or opinion; and
(iii) declaring that such person has made such examination or
investigation as such person believes is necessary to enable such person to
make the statements or give the opinions contained or expressed therein.
7.10 EXPERTS, ADVISERS AND AGENTS
The Trustee may:
(a) in relation to these presents act and rely on the opinion or
advice of or information obtained from or prepared by any solicitor,
auditor, accountant, appraiser, valuer, engineer or other expert, whether
retained by the Trustee or by Northstar and/or Devon or otherwise, and may
employ such assistants as may be necessary to the proper determination and
discharge of its powers and duties and determination of its rights
hereunder and may pay proper and reasonable compensation for all such legal
and other advice or assistance as aforesaid; and
(b) employ such agents and other assistants as it may reasonably
require for the proper determina-tion and discharge of its powers and
duties hereunder, and may pay reasonable remuneration for all services
performed for it (and shall be entitled to receive reasonable remuneration
for all services performed by it) in the discharge of the trusts hereof and
compensation for all disbursements, costs and expenses made or incurred by
it in the determination and discharge of its duties hereunder and in the
management of the Trust.
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7.11 INVESTMENT OF MONEYS HELD BY TRUSTEE
Unless otherwise provided in this agreement, any moneys held by or on
behalf of the Trustee which under the terms of this agreement may or ought to be
invested or which may be on deposit with the Trustee or which may be in the
hands of the Trustee, may be invested and reinvested in the name or under the
control of the Trustee in securities in which, under the laws of the Province of
Alberta, trustees are authorized to invest trust moneys; provided that such
securities are stated to mature within two years after their purchase by the
Trustee, and the Trustee shall so invest such moneys on the written direction of
Northstar. Pending the investment of any moneys as hereinbefore provided, such
moneys may be deposited in the name of the Trustee in any chartered bank in
Canada or, with the consent of Northstar, in the deposit department of the
Trustee or any other loan or trust company authorized to accept deposits under
the laws of Canada or any province thereof at the rate of interest then current
on similar deposits.
7.12 TRUSTEE NOT REQUIRED TO GIVE SECURITY
The Trustee shall not be required to give any bond or security in respect
of the execution of the trusts, rights, duties, powers and authorities of this
agreement or otherwise in respect of the premises.
7.13 TRUSTEE NOT BOUND TO ACT ON REQUEST
Except as in this agreement otherwise specifically provided, the Trustee
shall not be bound to act in accordance with any direction or request of
Northstar and/or Devon or of the directors thereof until a duly authenticated
copy of the instrument or resolution containing such direction or request shall
have been delivered to the Trustee, and the Trustee shall be empowered to act
and rely upon any such copy purporting to be authenticated and believed by the
Trustee to be genuine.
7.14 AUTHORITY TO CARRY ON BUSINESS
The Trustee represents to Northstar and Devon that at the date of execution
and delivery by it of this agreement it is authorized to carry on the business
of a trust company in the Province of Alberta but if, notwithstanding the
provisions of this Section 7.14, it ceases to be so authorized to carry on
business, the validity and enforceability of this agreement and the Voting
Rights, the Exchange Put Right, the Exchange Right and the Automatic Exchange
Rights shall not be affected in any manner whatsoever by reason only of such
event; provided, however, the Trustee shall, within 90 days after ceasing to be
authorized to carry on the business of a trust company in the Province of
Alberta, either become so authorized or resign in the manner and with the effect
specified in Article 10 hereof.
7.15 CONFLICTING CLAIMS
If conflicting claims or demands are made or asserted with respect to any
interest of any Holder in any Exchangeable Shares, including any disagreement
between the heirs, representatives, successors or assigns succeeding to all or
any part of the interest of any Holder in any Exchangeable Shares resulting in
conflicting claims or demands being made in connection with such interest, then
the Trustee shall be entitled, at its sole discretion, to refuse to recognize or
to comply with any such claim or demand. In so refusing, the Trustee may elect
not to exercise any Voting Rights, Exchange Put Right, Exchange Right or
Automatic Exchange Rights subject to such conflicting claims or demands and, in
so doing, the Trustee shall not be or become liable to any person on account of
such election or its failure or refusal to comply with any such conflicting
claims or demands. The Trustee shall be entitled to continue to refrain from
acting and to refuse to act until:
(a) the rights of all adverse claimants with respect to the Voting
Rights, Exchange Put Right, Exchange Right or Automatic Exchange Rights
subject to such conflicting claims or demands have been adjudicated by a
final judgment of a court of competent jurisdiction; or
(b) all differences with respect to the Voting Rights, Exchange Put
Right, Exchange Right or Automatic Exchange Rights subject to such
conflicting claims or demands have been conclusively settled
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by a valid written agreement binding on all such adverse claimants, and the
Trustee shall have been furnished with an executed copy of such agreement.
If the Trustee elects to recognize any claim or comply with any demand made
by any such adverse claimant, it may in its discretion require such claimant to
furnish such surety bond or other security satisfactory to the Trustee as it
shall deem appropriate fully to indemnify it as between all conflicting claims
or demands.
7.16 ACCEPTANCE OF TRUST
The Trustee hereby accepts the Trust created and provided for by and in
this agreement and agrees to perform the same upon the terms and conditions
herein set forth and to hold all rights, privileges and benefits conferred
hereby and by law in trust for the various persons who shall from time to time
be Holders, subject to all the terms and conditions herein set forth.
ARTICLE 8
COMPENSATION
Devon and Northstar jointly and severally agree to pay to the Trustee
reasonable compensation for all of the services rendered by it under this
agreement and will reimburse the Trustee for all reasonable expenses (including
but not limited to taxes, compensation paid to experts, agents and advisors, and
travel expenses) and disbursements, including the cost and expense of any suit
or litigation of any character and any proceedings before any governmental
agency, reasonably incurred by the Trustee in connection with its rights and
duties under this agreement; provided that Devon and Northstar shall have no
obligation to reimburse the Trustee for any expenses or disbursements paid,
incurred or suffered by the Trustee in any suit or litigation in which the
Trustee is determined to have acted in bad faith or with negligence or willful
misconduct.
ARTICLE 9
INDEMNIFICATION AND LIMITATION OF LIABILITY
9.1 INDEMNIFICATION OF THE TRUSTEE
Devon and Northstar jointly and severally agree to indemnify and hold
harmless the Trustee and each of its directors, officers, employees and agents
appointed and acting in accordance with this agreement (collectively, the
"Indemnified Parties") against all claims, losses, damages, costs, penalties,
fines and reasonable expenses (including reasonable expenses of the Trustee's
legal counsel) which, without fraud, negligence, willful misconduct or bad faith
on the part of such Indemnified Party, may be paid, incurred or suffered by the
Indemnified Party by reason of or as a result of the Trustee's acceptance or
administration of the Trust, its compliance with its duties set forth in this
agreement, or any written or oral instructions delivered to the Trustee by Devon
or Northstar pursuant hereto. In no case shall Devon or Northstar be liable
under this indemnity for any claim against any of the Indemnified Parties unless
Devon and Northstar shall be notified by the Trustee of the written assertion of
a claim or of any action commenced against the Indemnified Parties, promptly
after any of the Indemnified Parties shall have received any such written
assertion of a claim or shall have been served with a summons or other first
legal process giving information as to the nature and basis of the claim.
Subject to (ii) below, Devon and Northstar shall be entitled to participate at
their own expense in the defense and, if Devon or Northstar so elect at any time
after receipt of such notice, either of them may assume the defense of any suit
brought to enforce any such claim. The Trustee shall have the right to employ
separate counsel in any such suit and participate in the defense thereof, but
the fees and expenses of such counsel shall be at the expense of the Trustee
unless: (i) the employment of such counsel has been authorized by Devon or
Northstar, such authorization not to be unreasonably withheld; or (ii) the named
parties to any such suit include both the Trustee and Devon or Northstar and the
Trustee shall have been advised by counsel acceptable to Devon or Northstar that
there may be one or more legal defenses available to the Trustee that
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are different from or in addition to those available to Devon or Northstar and
that an actual or potential conflict of interest exists (in which case Devon and
Northstar shall not have the right to assume the defense of such suit on behalf
of the Trustee, but shall be liable to pay the reasonable fees and expenses of
counsel for the Trustee).
9.2 LIMITATION OF LIABILITY
The Trustee shall not be held liable for any loss which may occur by reason
of depreciation of the value of any part of the Trust Estate or any loss
incurred on any investment of funds pursuant to this agreement, except to the
extent that such loss is attributable to the fraud, negligence, willful
misconduct or bad faith on the part of the Trustee.
ARTICLE 10
CHANGE OF TRUSTEE
10.1 RESIGNATION
The Trustee, or any trustee hereafter appointed, may at any time resign by
giving written notice of such resignation to Devon and Northstar specifying the
date on which it desires to resign, provided that such notice shall never be
given less than 60 days before such desired resignation date unless Devon and
Northstar otherwise agree and provided further that such resignation shall not
take effect until the date of the appointment of a successor trustee and the
acceptance of such appointment by the successor trustee. Upon receiving such
notice of resignation, Devon and Northstar shall promptly appoint a successor
trustee by written instrument, in duplicate, one copy of which shall be
delivered to the resigning trustee and one copy to the successor trustee.
Failing acceptance by a successor trustee, a successor trustee may be appointed
by an order of the superior court of the province in which Northstar has its
registered office upon application of one or more of the parties hereto.
10.2 REMOVAL
The Trustee, or any trustee hereafter appointed, may be removed with or
without cause, at any time on 60 days prior notice by written instrument
executed by Devon and Northstar, in duplicate, one copy of which shall be
delivered to the trustee so removed and one copy to the successor trustee;
provided that, in connection with such removal, provision is made for a
replacement trustee similar to that contemplated in Section 10.1.
10.3 SUCCESSOR TRUSTEE
Any successor trustee appointed as provided under this agreement shall
execute, acknowledge and deliver to Devon and Northstar and to its predecessor
trustee an instrument accepting such appointment. Thereupon the resignation or
removal of the predecessor trustee shall become effective and such successor
trustee, without any further act, deed or conveyance, shall become vested with
all the rights, powers, duties and obligations of its predecessor under this
agreement, with like effect as if originally named as trustee in this agreement.
However, on the written request of Devon and Northstar or of the successor
trustee, the trustee ceasing to act shall, upon payment of any amounts then due
it pursuant to the provisions of this agreement, execute and deliver an
instrument transferring to such successor trustee all the rights and powers of
the trustee so ceasing to act. Upon the request of any such successor trustee,
Devon, Northstar and such predecessor trustee shall execute any and all
instruments in writing for more fully and certainly vesting in and confirming to
such successor trustee all such rights and powers.
10.4 NOTICE OF SUCCESSOR TRUSTEE
Upon acceptance of appointment by a successor trustee as provided herein,
Devon and Northstar shall cause to be mailed notice of the succession of such
trustee hereunder to each Holder specified in a List. If Devon or Northstar
shall fail to cause such notice to be mailed within 10 days after acceptance of
appointment
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by the successor trustee, the successor trustee shall cause such notice to be
mailed at the expense of Devon and Northstar.
ARTICLE 11
DEVON SUCCESSORS
11.1 CERTAIN REQUIREMENTS IN RESPECT OF COMBINATION, ETC.
Devon shall not enter into any transaction (whether by way of
reconstruction, reorganization, consolidation, merger, transfer, sale, lease or
otherwise) whereby all or substantially all of its undertaking, property and
assets would become the property of any other Person or, in the case of a
merger, of the continuing corporation resulting therefrom, but may do so if:
(a) such other Person or continuing corporation (the "Devon
Successor"), by operation of law, becomes, without further action, bound by
the terms and provisions of this agreement or, if not so bound, executes,
prior to or contemporaneously with the consummation of such transaction an
agreement supplemental hereto and such other instruments (if any) as are
satisfactory to the Trustee and in the opinion of legal counsel to the
Trustee are necessary or advisable to evidence the assumption by the Devon
Successor of liability for all moneys payable and property deliverable
hereunder, the covenant of such Devon Successor to pay and deliver or cause
to be delivered the same and its agreement to observe and perform all the
covenants and obligations of Devon under this agreement; and
(b) such transaction shall, to the satisfaction of the Trustee and in
the opinion of legal counsel to the Trustee, be upon such terms which
substantially preserve and do not impair in any material respect any of the
rights, duties, powers and authorities of the Trustee or of the Holders
hereunder.
11.2 VESTING OF POWERS IN SUCCESSOR
Whenever the conditions of Section 11.1 hereof have been duly observed and
performed, the Trustee, if required by Section 11.1 hereof, the Devon Successor
and Northstar shall execute and deliver the supplemental agreement provided for
in Article 12 hereof, and thereupon the Devon Successor shall possess and from
time to time may exercise each and every right and power of Devon under this
agreement in the name of Devon or otherwise and any act or proceeding by any
provision of this agreement required to be done or performed by the board of
directors of Devon or any officers of Devon may be done and performed with like
force and effect by the directors or officers of such Devon Successor.
11.3 WHOLLY-OWNED SUBSIDIARIES
Nothing herein shall be construed as preventing the amalgamation or merger
of any wholly-owned subsidiary of Devon with or into Devon or the winding-up,
liquidation or dissolution of any wholly-owned subsidiary of Devon provided that
all of the assets of such subsidiary are transferred to Devon or another
wholly-owned subsidiary of Devon, and any such transactions are expressly
permitted by this Article 11.
ARTICLE 12
AMENDMENTS AND SUPPLEMENTAL AGREEMENTS
12.1 AMENDMENTS, MODIFICATIONS, ETC.
Subject to Sections 12.2 and 12.4, this agreement may not be amended,
modified or waived except by an agreement in writing executed by Northstar,
Devon and the Trustee and approved by the Holders in accordance with Section
10.2 of the Exchangeable Share Provisions. No amendment to or modification or
waiver of any of the provisions of this agreement otherwise permitted hereunder
shall be effective unless made in writing and signed by all of the parties
hereto.
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12.2 MINISTERIAL AMENDMENTS
Notwithstanding the provisions of Section 12.1 hereof, the parties to this
agreement may in writing, at any time and from time to time, without the
approval of the Holders, amend or modify this agreement for the purposes of:
(a) adding to the covenants of any or all of the parties hereto for
the protection of the Holders hereunder;
(b) making such amendments or modifications not inconsistent with this
agreement as may be necessary or desirable with respect to matters or
questions which, in the opinion of the board of directors of each of Devon
and Northstar and in the opinion of the Trustee and its counsel, having in
mind the best interests of the Holders as a whole, it may be expedient to
make, provided that such boards of directors and the Trustee and its
counsel shall be of the opinion that such amendments and modifications will
not be prejudicial to the interests of the Holders as a whole; or
(c) making such changes or corrections which, on the advice of counsel
to Northstar, Devon and the Trustee, are required for the purpose of curing
or correcting any ambiguity or defect or inconsistent provision or clerical
omission or mistake or manifest error; provided that the Trustee and its
counsel and the board of directors of each of Northstar and Devon shall be
of the opinion that such changes or corrections will not be prejudicial to
the interests of the Holders as a whole.
12.3 MEETING TO CONSIDER AMENDMENTS
Northstar, at the request of Devon, shall call a meeting or meetings of the
Holders for the purpose of considering any proposed amendment or modification
requiring approval pursuant hereto. Any such meeting or meetings shall be called
and held in accordance with the by-laws of Northstar, the Exchangeable Share
Provisions and all applicable laws.
12.4 CHANGES IN CAPITAL OF DEVON AND NORTHSTAR
At all times after the occurrence of any event effected pursuant to Section
2.7 or Section 2.8 of the Support Agreement, as a result of which either Devon
Common Stock or the Exchangeable Shares or both are in any way changed, this
agreement shall forthwith be amended and modified as necessary in order that it
shall apply with full force and effect, mutatis mutandis, to all new securities
into which Devon Common Stock or the Exchangeable Shares or both are so changed,
and the parties hereto shall execute and deliver a supplemental agreement giving
effect to and evidencing such necessary amendments and modifications.
12.5 EXECUTION OF SUPPLEMENTAL AGREEMENTS
From time to time, Northstar (when authorized by a resolution of its Board
of Directors), Devon (when authorized by a resolution of its board of directors)
and the Trustee may, subject to the provisions of these presents, and they
shall, when so directed by these presents, execute and deliver by their proper
officers, agreements or other instruments supplemental hereto, which thereafter
shall form part hereof, for any one or more of the following purposes:
(a) evidencing the succession of any Devon Successors to Devon and the
covenants of and obligations assumed by each such Devon Successor in
accordance with the provisions of Article 11 and the successor of any
successor trustee in accordance with the provisions of Article 10;
(b) making any additions to, deletions from or alterations of the
provisions of this agreement or the Voting Rights, the Exchange Put Right,
the Exchange Right or the Automatic Exchange Rights which, in the opinion
of the Trustee and its counsel, will not be prejudicial to the interests of
the Holders as a whole or are in the opinion of counsel to the Trustee
necessary or advisable in order to incorporate, reflect or comply with any
legislation the provisions of which apply to Devon, Northstar, the Trustee
or this agreement; and
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(c) for any other purposes not inconsistent with the provisions of
this agreement, including without limitation to make or evidence any
amendment or modification to this agreement as contemplated hereby,
provided that, in the opinion of the Trustee and its counsel, the rights of
the Trustee and the Holders as a whole will not be prejudiced thereby.
ARTICLE 13
TERMINATION
13.1 TERM
The Trust created by this agreement shall continue until the earliest to
occur of the following events:
(a) no outstanding Exchangeable Shares are held by a Holder;
(b) each of Northstar and Devon elects in writing to terminate the
Trust and such termination is approved by the Holders of the Exchangeable
Shares in accordance with Section 10.1 of the Exchangeable Share
Provisions; and
(c) 21 years after the death of the last survivor of the descendants
of His Majesty King George VI of the United Kingdom of Great Britain and
Northern Ireland living on the date of the creation of the Trust.
13.2 SURVIVAL OF AGREEMENT
This agreement shall survive any termination of the Trust and shall
continue until there are no Exchangeable Shares outstanding held by a Holder;
provided, however, that the provisions of Articles 8 and 9 hereof shall survive
any such termination of this agreement.
ARTICLE 14
GENERAL
14.1 SEVERABILITY
If any provision of this agreement is held to be invalid, illegal or
unenforceable, the validity, legality or enforceability of the remainder of this
agreement shall not in any way be affected or impaired thereby, and the
agreement shall be carried out as nearly as possible in accordance with its
original terms and conditions.
14.2 INUREMENT
This agreement shall be binding upon and inure to the benefit of the
parties hereto and their respective successors and permitted assigns and to the
benefit of the Holders.
14.3 NOTICES TO PARTIES
All notices and other communications between the parties hereunder shall be
in writing and shall be deemed to have been given if delivered personally or by
confirmed telecopy to the parties at the following addresses (or at such other
address for such party as shall be specified in like notice):
(a) if to Devon to:
Devon Energy Corporation
20 North Broadway
Suite 1500
Oklahoma City, Oklahoma
73102-8260
Attention: President
Facsimile No. 405-552-8171
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(b) if to Northstar to:
Northstar Energy Corporation
3000, 400 -- 3rd Avenue S.W.
Calgary, Alberta
T2P 4H2
Attention: President
Facsimile No. 403---
(c) if to the Trustee to:
--
--
--
Any notice or other communication given personally shall be deemed to have
been given and received upon delivery thereof, and if given by telecopy shall be
deemed to have been given and received on the date of receipt thereof unless
such day is not a Business Day in which case it shall be deemed to have been
given and received upon the immediately following Business Day.
14.4 NOTICE TO HOLDERS
Any and all notices to be given and any documents to be sent to any Holders
may be given or sent to the address of such Holder shown on the register of
Holders of Exchangeable Shares in any manner permitted by the Exchangeable Share
Provisions and shall be deemed to be received (if given or sent in such manner)
at the time specified in such Exchangeable Share Provisions, the provisions of
which Exchangeable Share Provisions shall apply mutatis mutandis to notices or
documents as aforesaid sent to such Holders.
14.5 RISK OF PAYMENTS BY POST
Whenever payments are to be made or documents are to be sent to any Holder
by the Trustee, by Northstar or by Devon or by such Holder to the Trustee or to
Devon or Northstar, the making of such payment or sending of such document sent
through the mail shall be at the risk of Northstar or Devon, in the case of
payments made or documents sent by the Trustee or Northstar or Devon, and the
Holder, in the case of payments made or documents sent by the Holder.
14.6 COUNTERPARTS
This agreement may be executed in counterparts, each of which shall be
deemed an original, but all of which taken together shall constitute one and the
same instrument.
14.7 JURISDICTION
This agreement shall be construed and enforced in accordance with the laws
of the Province of Alberta and the federal laws of Canada applicable therein.
14.8 ATTORNMENT
Devon agrees that any action or proceeding arising out of or relating to
this agreement may be instituted in the courts of Alberta, waives any objection
which it may have now or hereafter to the venue of any such action or
proceeding, irrevocably submits to the jurisdiction of such courts in any such
action or proceeding, agrees to be bound by any judgment of such courts and
agrees not to seek, and hereby waives, any review of the merits of any such
judgment by the courts of any other jurisdiction and hereby appoints Northstar
at its registered office in the Province of Alberta as Devon's attorney for
service of process.
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IN WITNESS WHEREOF, the parties hereby have caused this agreement to be
duly executed as of the date first above written.
DEVON ENERGY CORPORATION
By:
----------------------------------
--
--
NORTHSTAR ENERGY CORPORATION
By:
----------------------------------
--
--
--
By:
----------------------------------
(name)
(title)
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<PAGE> 306
ANNEX H
MERRILL LYNCH FAIRNESS OPINION
June 29, 1998
Board of Directors
Devon Energy Corporation
20 North Broadway, Suite 1500
Oklahoma City, Oklahoma 73102-8260
Members of the Board of Directors:
Northstar Energy Corporation (the "Company") and Devon Energy Corporation
(the "Acquiror") propose to enter into a Combination Agreement dated as of June
29, 1998 (the "Agreement") which includes a Plan of Arrangement (the "Plan of
Arrangement") pursuant to which the common shares of the Company will be
acquired by the Acquiror in a transaction (the "Arrangement") in which each
outstanding common share of the Company, no par value per share (the "Company
Shares"), will be exchanged for 0.227 (the "Exchange Ratio") of an exchangeable
share (an "Exchangeable Share") of the Company. As set forth in the Agreement,
each Exchangeable Share will have certain rights, privileges, restrictions and
conditions attached to it, including the right to receive in exchange therefor
one share of the common stock of the Acquiror, par value $0.10 per share (the
"Acquiror Shares"). The Exchange Ratio will increase on a pro rata basis (to
provide a value of C$11.00 per Company Share) if the market price of the
Acquiror Shares declines below US$32.95 per share (based on current U.S./Canada
exchange rates) up to a maximum of 0.235 of an Exchangeable Share.
You have asked us whether, in our opinion, the Exchange Ratio is fair from
a financial point of view to the Acquiror.
In arriving at the opinion set forth below, we have, among other things:
(1) Reviewed certain publicly available business and financial
information relating to the Company and the Acquiror that we deemed to be
relevant;
(2) Reviewed certain reserve reports as of December 31, 1997 (the
"Company Reserve Reports") prepared by the Company and the Company's
independent petroleum engineers (the "Company's Petroleum Engineers");
(3) Reviewed certain reserve reports as of December 31, 1997 (together
with the Company Reserve Reports, the "Reserve Reports") prepared by the
Acquiror and by the Acquiror's independent petroleum engineers (together
with the Company's Petroleum Engineers, the "Petroleum Engineers");
(4) Reviewed certain information, including financial forecasts,
relating to the business, earnings, cash flow, assets, liabilities and
prospects of the Company and the Acquiror, as well as the amount and timing
of the cost savings and related expenses expected to result from the
Arrangement furnished to us by the Company and the Acquiror, respectively;
(5) Conducted discussions with members of senior management of the
Company and the Acquiror concerning the matters described in clauses 1
through 4 above as well as their respective businesses and prospects before
and after giving effect to the Arrangement;
(6) Conducted discussions with members of KPMG Peat Marwick LLP and
Deloitte & Touche LLP, the Acquiror's and Company's respective independent
certified public accountants;
(7) Reviewed the market prices and valuation multiples for the Company
Shares and the Acquiror Shares and compared them with those of certain
publicly traded companies that we deemed to be relevant;
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<PAGE> 307
(8) Reviewed the results of operations of the Company and the Acquiror
and compared them with those of certain publicly traded companies that we
deemed to be relevant;
(9) Compared the proposed financial terms of the Arrangement with the
financial terms of certain other transactions that we deemed to be
relevant;
(10) Reviewed the potential pro forma impact of the Arrangement;
(11) Reviewed a draft of the Agreement, including a draft of the Plan
of Arrangement; and
(12) Reviewed such other financial studies and analyses and took into
account such other matters as we deemed necessary, including our assessment
of general economic, market and monetary conditions.
In preparing our opinion, we have assumed and relied on the accuracy and
completeness of all information supplied or otherwise made available to us,
discussed with or reviewed by or for us, or publicly available, and we have not
assumed any responsibility for independently verifying such information or
undertaken an independent evaluation or appraisal of any of the assets or
liabilities of the Company or the Acquiror or been furnished with any such
evaluation or appraisal other than the Reserve Reports. In addition, we have not
assumed any obligation to conduct, nor have we conducted, any physical
inspection of the properties or facilities of the Company or the Acquiror. With
respect to the financial forecast information furnished to or discussed with us
by the Company or the Acquiror, we have assumed that such information has been
reasonably prepared and reflects the best currently available estimates and
judgment of the Company's or the Acquiror's management as to the expected future
financial performance of the Company or the Acquiror, as the case may be. In
addition, we have assumed that the Reserve Reports have been reasonably prepared
and reflect the best currently available estimates and judgments of the Company
and the Acquiror and their respective Petroleum Engineers as to their respective
reserves, their future hydrocarbon production volume and associated costs. We
have further assumed that the Arrangement will be accounted for as a pooling of
interests under generally accepted accounting principles. We have also assumed
that the final form of the Agreement, including the Plan of Arrangement, will be
substantially similar to the last draft reviewed by us.
Our opinion is necessarily based upon market, economic and other conditions
as they exist and can be evaluated on, and on the information made available to
us as of, the date hereof. We have assumed that in the course of obtaining the
necessary regulatory or other consents or approvals (contractual or otherwise)
for the Arrangement, no restrictions, including any divestiture requirements or
amendments or modifications, will be imposed that will have a material adverse
effect on the contemplated benefits of the Arrangement.
We have been retained to issue a fairness opinion in connection with the
Arrangement and will receive a fee from the Acquiror for our services. In
addition, the Acquiror has agreed to indemnify us for certain liabilities
arising out of our engagement. In the ordinary course of our business, we may
actively trade the Acquiror Shares or Company Shares for our own account and for
the accounts of customers and, accordingly, may at any time hold a long or short
position in such securities. Currently, we hold approximately 2,201,500 Acquiror
Shares, representing approximately 6.8% of the outstanding Acquiror Shares,
through various affiliates.
This opinion is for the use and benefit of the Board of Directors of the
Acquiror. Our opinion does not address the merits of the underlying decision by
the Acquiror to engage in the Arrangement and does not constitute a
recommendation to any shareholder of the Company or the Acquiror as to how such
shareholder should vote on the proposed Arrangement or any matter related
thereto.
We are not expressing any opinion herein as to the prices at which the
Acquiror Shares or the Exchangeable Shares will trade following the announcement
or consummation of the Arrangement.
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<PAGE> 308
On the basis of and subject to the foregoing, we are of the opinion that,
as of the date hereof, the Exchange Ratio is fair from a financial point of view
to the Acquiror.
Very truly yours,
MERRILL LYNCH, PIERCE, FENNER &
SMITH INCORPORATED
(signed) FENNER & SMITH MERRILL
LYNCH, PIERCE, INCORPORATED
H-3
<PAGE> 309
ANNEX I
MORGAN STANLEY & CO. INCORPORATED FAIRNESS OPINION
JUNE 29, 1998
Board of Directors
Northstar Energy Corporation
Canterra Tower
3000, 400 -- 3rd Avenue S.W.
Calgary, Alberta T2P 4H2
Members of the Board:
We understand that Northstar Energy Corporation ("Northstar" or the
"Company") and Devon Energy Corporation ("Devon") propose to enter into a
Combination Agreement, substantially in the form of the draft dated June 29,
1998 (the "Combination Agreement"), which provides, among other things, for the
exchange of (i) all outstanding shares of common stock, no par value, of
Northstar (the "Northstar Common Shares"), other than Northstar Common Shares
held by holders who have exercised their rights of dissent or Northstar Common
Shares held in treasury or held by Devon or any affiliate of Devon or Northstar,
for the right to receive 0.227 Exchangeable Shares as defined in the Combination
Agreement (the "Stock Consideration") in the capital of Northstar, and (ii)
outstanding options (the "Northstar Options") to purchase Northstar Common
Shares for the right to receive options to purchase 0.227 Exchangeable Shares
(the "Option Consideration" and, together with the Stock Consideration, the
Consideration") subject, in each case, to adjustment in certain circumstances
(collectively, the "Combination"). The terms and conditions of the Combination
are more fully set forth in the Combination Agreement.
You have asked for our opinion as to whether the Consideration to be
received pursuant to the Combination Agreement in the aggregate is fair from a
financial point of view to the holders of Northstar Common Shares and Northstar
Options.
For purposes of the opinion set forth herein, we have:
(i) reviewed certain publicly available financial statements and other
information of the Company and Devon, respectively;
(ii) reviewed certain internal financial statements and other
financial and operating data concerning the Company and Devon prepared by
the managements of the Company and Devon, respectively;
(iii) discussed the past and current operations and financial
condition and the prospects of the Company with senior executives of the
Company;
(iv) discussed the past and current operations and financial condition
and the prospects of Devon with senior executives of Devon;
(v) analyzed certain financial projections prepared by the managements
of the Company and Devon respectively;
(vi) reviewed the pro forma impact of the Combination on Devon's
earnings per share, cash flow, oil and gas reserves and production,
consolidated capitalization and financial ratios;
(vii) reviewed the reported prices and trading activity for the
Northstar Common Shares and the common stock, par value of US$0.10 per
share, of Devon (the "Devon Common Stock") into which the Exchangeable
Shares are exchangeable on a 1:1 basis;
(viii) compared the financial performance of the Company and the
prices and trading activity of the Northstar Common Shares with that of
certain other comparable publicly-traded companies and their securities;
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(ix) compared the financial performance of Devon and the prices and
trading activity of the Devon Common Stock with that of certain other
comparable publicly-traded companies and their securities;
(x) reviewed the financial terms, to the extent publicly available, of
certain comparable acquisition transactions;
(xi) reviewed the draft of the Combination Agreement and certain
related documents, including the terms of the Exchangeable Shares and the
terms of the Northstar Options;
(xii) reviewed reports evaluating certain of the Company's 1997 year
end oil, natural gas and natural gas liquids reserves prepared by Paddock
Lindstrom & Associates Ltd., dated February 4, 1998, and by John P. Hunter
& Associates, Ltd., dated February 27, 1998, and certain other internal
evaluations of reserves prepared by Company engineers;
(xiii) reviewed an Appraisal Report evaluating certain of Devon's 1997
year end domestic proved reserves prepared by La Roche Petroleum and
Consultants, Ltd. dated as of December 31, 1997 and an evaluation of 1997
year end proven reserves owned by Devon Energy Canada Corporation prepared
by AMH Group Ltd. dated December 31, 1997; and
(xiv) performed such other analyses, as we have deemed appropriate.
We have assumed and relied upon without independent verification the
accuracy and completeness of the information reviewed by us for the purposes of
this opinion. With respect to the financial projections, we have assumed that
they have been reasonably prepared on bases reflecting the best currently
available estimates and judgments of the future financial performances of the
Company and Devon. In addition, we have assumed that the Combination will be
consummated in accordance with the terms set forth in the Combination Agreement,
including, among other things, that the Combination will be treated as a
tax-deferred exchange pursuant to the Income Tax Act of Canada. We have not made
any independent valuation or appraisal of the assets or liabilities of the
Company, or Devon, however, we have reviewed the reports referred to in
paragraphs (xii) and (xiii) above and have relied without independent
verification upon such items for the purposes of this opinion. Our opinion is
necessarily based on economic, market and other conditions as in effect on, and
the information made available to us as of, the date hereof.
We have been retained to provide an opinion letter to the Board of
Directors of Northstar in connection with the Combination and will receive a fee
for our services. In the past, Morgan Stanley & Co. Incorporated and its
affiliates have provided financial advisory and financing services to Devon and
its affiliates and have received fees for the rendering of these services.
It is understood that this letter is for the information of the Board of
Directors of Northstar and may not be used for any other purpose without our
prior written consent, except that this opinion may be included in its entirety
in any filing made by the Company in respect to the Combination.
In addition, this opinion does not in any manner address the prices at
which Devon Common Stock or the Exchangeable Shares of New Northstar will trade
following the consummation of the Combination, and Morgan Stanley expresses no
opinion or recommendation as to how the shareholders of the Company and Devon
should vote at the shareholders' meetings held in connection with the
Combination. In addition, we express no view or recommendation as to whether any
holder of Northstar Options should exercise such Northstar Options at any time.
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<PAGE> 311
Based on the foregoing, we are of the opinion on the date hereof that the
Consideration to be received pursuant to the Combination Agreement in the
aggregate is fair from a financial point of view to the holders of Northstar
Common Shares and Northstar Options.
Very truly yours,
MORGAN STANLEY & CO.
INCORPORATED
By: (signed) DONALD S. REID
----------------------------------
Donald S. Reid
Managing Director
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<PAGE> 312
ANNEX J
RBC DOMINION SECURITIES INC. FAIRNESS OPINION
June 29, 1998
The Shareholders and Optionholders
Northstar Energy Corporation
3000, 400 - 3rd Avenue S.W.
Calgary, Alberta
T2P 4H2
To the Shareholders and Optionholders of Northstar Energy Corporation
("Northstar Security Holders"):
RBC Dominion Securities Inc. ("RBC DS") understands that Devon Energy
Corporation ("Devon") and Northstar Energy Corporation ("Northstar" or the
"Company") have entered into an arrangement (the "Arrangement") whereby each
common share of Northstar (the "Northstar Shares") will be exchanged for 0.227
exchangeable shares of a subsidiary of Devon (the "Devon Exchangeable Shares" or
the "Share Consideration"). Each Devon Exchangeable Share will be exchangeable
on a one for one basis into Devon common shares ("Devon Shares") and will carry
the same voting rights and dividend entitlement as Devon Shares. The Arrangement
also provides a collar (the "Collar") such that if the market value of Devon
Shares times 0.227 would yield a nominal value of less than $11.00 per Northstar
Share, the exchange ratio would be increased pro rata up to a maximum of 0.235
Devon Exchangeable Shares. For the purposes of determining whether the Collar
comes into effect, the market value of Devon Shares, the Northstar Shares and
the U.S./ Canadian dollar exchange rate shall be based upon their respective
average closing values on their principal markets being the American Stock
Exchange for Devon, the Toronto Stock Exchange for Northstar, and the average
noon foreign exchange day rate at the Bank of Canada for the 10 days immediately
prior to closing. The Devon Exchangeable Shares will be listed on The Toronto
Stock Exchange.
The terms of the Arrangement will be more fully described in an arrangement
circular (the "Arrangement Circular") which will be mailed to shareholders of
the Company in connection with the Arrangement.
The board of directors (the "Board") of the Company has retained RBC DS to
provide advice and assistance to the Board in evaluating the Arrangement,
including the preparation and delivery to the Board of RBC DS' opinion as to the
fairness of the Arrangement from a financial point of view to the holders of
Northstar Shares (the "Fairness Opinion"). The Fairness Opinion has been
prepared in accordance with the guidelines of the Investment Dealers Association
of Canada. RBC DS has not prepared a valuation of the Company, Devon or any of
their respective subsidiaries or assets and the Fairness Opinion should not be
construed as such.
ENGAGEMENT
On June 12, 1998, the Board and RBC DS entered into an agreement (the
"Engagement Agreement") pursuant to which the Board requested that RBC DS
provide financial advisory services in connection with any possible business
combination of the Company and another party. The Board had previously engaged
Morgan Stanley & Co. ("Morgan Stanley") earlier in 1998. The terms of the
Engagement Agreement provide that RBC DS is to be paid a fee of approximately
$4.1 million if the Arrangement is completed, and a fee of $1.0 million if the
Arrangement is not completed. RBC DS is to be reimbursed for its reasonable
out-of-pocket expenses and to be indemnified by the Company in certain
circumstances. RBC DS consents to the inclusion of the Fairness Opinion in its
entirety and a summary thereof in the Arrangement Circular and the filing
thereof with the securities commissions or similar regulatory authorities in
each province of Canada.
RELATIONSHIP WITH INTERESTED PARTIES
Neither RBC DS, nor any of its affiliates is an insider, associate or
affiliate (as those terms are defined in the Securities Act (Ontario) (the
"Act")) of the Company, Devon or any of their respective associates or
affiliates. RBC DS has been engaged to provide financial advisory services to
Devon within the past two years,
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the compensation of which was not material to RBC DS. RBC DS has also been
engaged by the Company to provide financial advisory services to the Company
within the past two years in connection with the purchase of Morrison Petroleums
Ltd. and the sale of Morrison Middlefield Resources Limited. There are no
understandings, agreements or commitments between RBC DS and the Company, Devon
or any of their respective associates or affiliates with respect to any future
business dealings. RBC DS may, in the future, in the ordinary course of its
business, perform financial advisory or investment banking services for the
Company, Devon or any of their respective associates or affiliates. The Royal
Bank of Canada, controlling shareholder of RBC DS, has provided banking services
to the Company in the normal course of business.
RBC DS acts as a trader and dealer, both as principal and agent, in major
financial markets and, as such, may have had and may in the future have
positions in the securities of the Company, Devon or any of their respective
associates or affiliates and, from time to time, may have executed or may
execute transactions on behalf of such companies or clients for which it
received or may receive compensation. As an investment dealer, RBC DS conducts
research on securities and may, in the ordinary course of its business, provide
research reports and investment advice to its clients on investment matters,
including with respect to the Company, Devon or the Arrangement.
CREDENTIALS OF RBC DOMINION SECURITIES
RBC DS is one of Canada's largest investment banking firms, with operations
in all facets of corporate and government finance, mergers and acquisitions,
equity and fixed income sales and trading and investment research. The Fairness
Opinion expressed herein represents the opinion of RBC DS and the form and
content herein have been approved for release by a committee of its directors,
each of whom is experienced in merger, acquisition, divestiture and valuation
matters.
SCOPE OF REVIEW
In connection with our Fairness Opinion, we have reviewed and relied upon
or carried out, among other things, the following:
1. the combination agreement dated June 29, 1998 (the "Combination
Agreement") between Northstar and Devon;
2. audited financial statements of the Company and Devon for the five
years ended December 31, 1997;
3. the unaudited interim reports of the Company and Devon for the
three months ended March 31, 1998;
4. annual reports of the Company and Devon for the two years ended
December 31, 1996 and 1997;
5. the Notices of Annual Meetings of Shareholders and Management
Information Circulars of the Company and Devon for the two years ended
December 31, 1996 and 1997;
6. annual information forms of the Company and Form 10-K's of Devon
for the two years ended December 31, 1996 and 1997;
7. internal management budgets of the Company and Devon for the year
ending December 31, 1998;
8. internal management five year operational and financial forecasts
of Devon and the Company;
9. discussions with senior management of Northstar and Devon;
10. discussions with senior management of Northstar and Devon
reviewing first quarter exploration results;
11. discussions with both Northstar's and Devon's auditors and legal
counsel;
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12. public information relating to the business, operations, financial
performance and stock trading history of Northstar, Devon and other
selected public companies considered by us to be relevant;
13. public information with respect to other transactions of a
comparable nature considered by us to be relevant;
14. the reports of John P. Hunter and Associates Ltd. ("Hunter") and
Paddock Lindstrom & Associates ("Paddock"), independent engineering
consultants, regarding the Company's petroleum reserves, with an effective
date of December 31, 1997;
15. the report of LaRoche Petroleum Consultants, Ltd. ("LaRoche"),
independent engineering consultants, regarding Devon's petroleum reserves,
with an effective date of December 31, 1997;
16. discussions with Hunter and Paddock regarding the reserves of
Northstar;
17. discussions with LaRoche regarding the reserves of Devon;
18. information pertaining to the Company's income tax pools and
Devon's tax credits as provided by the Company and Devon, respectively;
19. representations contained in a certificate addressed to us, dated
as of the date hereof, from senior officers of the Company as to the
completeness and accuracy of the information upon which the Fairness
Opinion is based; and
20. such other corporate, industry and financial market information,
investigations and analyses as RBC DS considered necessary or appropriate
in the circumstances.
RBC DS has not, to the best of its knowledge, been denied access by the
Company or Devon to any information requested by RBC DS.
PRIOR VALUATIONS
The Company and Devon have represented to RBC DS that there have not been
any prior valuations (as defined in Ontario Securities Commission Policy 9.1) of
the Company, Devon or their material assets or securities, respectively, in the
past twenty-four month period.
ASSUMPTIONS AND LIMITATIONS
With the Board's approval and as provided for in the Engagement Agreement,
RBC DS has relied upon the completeness, accuracy and fair presentation of all
of the financial and other information, data, advice, opinions or
representations obtained by it from public sources, senior management of the
Company and Devon and their respective consultants and advisors (collectively,
the "Information"). The Fairness Opinion is conditional upon such completeness,
accuracy and fair presentation of such Information. Subject to the exercise of
professional judgment and except as expressly described herein, we have not
attempted to verify independently the completeness, accuracy or fair
presentation of any of the Information.
Senior officers of the Company have represented to RBC DS in a certificate
delivered as of the date hereof, among other things, that (i) the Information
(as defined above) provided orally by, or in the presence of, an officer of the
Company or in writing by the Company or any of its subsidiaries or their
respective agents to RBC DS relating to the Company or any of its subsidiaries
or to the Arrangement, for the purpose of preparing the Fairness Opinion was, at
the date the Information was provided to RBC DS, and is, except as has been
disclosed in writing to RBC DS, complete, true and correct in all material
respects, and did not, and does not, contain any untrue statement of a material
fact in respect of the Company, its subsidiaries or the Arrangement, and did
not, and does not, omit to state a material fact in respect of the Company, its
subsidiaries or the Arrangement necessary to make the Information not misleading
in light of the circumstances under which the Information was made or provided;
and that (ii) since the dates on which the Information was provided to RBC DS,
except as disclosed in writing to RBC DS, or as publicly disclosed by the
Company, there has been no material change, financial or otherwise, in the
financial condition, assets,
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liabilities (contingent or otherwise), business, operations or prospects of the
Company or any if its subsidiaries and no material change has occurred in the
Information or any part thereof which would have, or which would reasonably be
expected to have, a material effect on the Fairness Opinion.
In preparing the Fairness Opinion, RBC DS has made several assumptions,
including that all of the conditions required to implement the Arrangement will
be met and that the disclosure provided or incorporated by reference in the
Arrangement Circular with respect to the Company, its subsidiaries and
affiliates and the Arrangement is accurate in all material respects.
The Fairness Opinion is rendered on the basis of securities markets,
economic, financial and general business conditions prevailing as at the date
hereof and the condition and prospects, financial and otherwise, of the Company,
Devon and their respective subsidiaries and affiliates, as they were reflected
in the Information and as they have been represented to RBC DS in discussions
with management of the Company and Devon. In its analyses and in preparing the
Fairness Opinion, RBC DS made numerous assumptions with respect to industry
performance, general business and economic conditions and other matters, many of
which are beyond the control of RBC DS or any party involved in the Arrangement.
The Fairness Opinion has been provided for the use of the Board and may not
be used by any other person or relied upon by any other person other than the
Board without the express prior written consent of RBC DS. The Fairness Opinion
is given as of the date hereof and RBC DS disclaims any undertaking or
obligation to advise any person of any change in any fact or matter affecting
its Fairness Opinion which may come or be brought to RBC DS' attention after the
date hereof. Without limiting the foregoing, in the event that there is any
material change in any fact or matter affecting the Fairness Opinion after the
date hereof, RBC DS reserves the right to change, modify or withdraw its
Fairness Opinion.
RBC DS believes that its analyses must be considered as a whole and that
selecting portions of the analyses or the factors considered by it, without
considering all factors and analyses together, could create a misleading view of
the process underlying the Fairness Opinion. The preparation of a fairness
opinion is a complex process and is not necessarily susceptible to partial
analysis or summary description. Any attempt to do so could lead to undue
emphasis on any particular factor or analysis. The Fairness Opinion is not to be
construed as a recommendation to any holder of Northstar Shares as to whether to
vote in favour of the Arrangement. We are not expressing any opinion as to the
price at which the Devon Exchangeable Shares will trade following the
announcement of the Arrangement.
OVERVIEW OF THE COMPANY
Northstar is actively engaged in the business of petroleum and natural gas
exploration, development, production, processing and marketing. Northstar's oil
and gas operations are concentrated primarily within the Province of Alberta. As
at December 31, 1997, the Company had approximately 450 employees. For the year
ended December 31, 1997, Northstar's revenues, net of royalties, were $255.5
million and net income was $50.1 million.
The following table summarizes Northstar's proven and probable reserves
before deduction of royalties:
<TABLE>
<CAPTION>
December 31, 1997 December 31, 1996
----------------- -----------------
<S> <C> <C>
Crude oil and NGLs (mmbbls).......................... 66.5 59.1
Natural Gas (bcf).................................... 920.0 771.0
</TABLE>
The following table summarizes Northstar's daily production of crude oil
and NGLs and sales of natural gas before deduction of royalties for the periods
indicated:
<TABLE>
<CAPTION>
Three Months Ended Year Ended
March 31, 1998 December 31, 1997
------------------ -----------------
<S> <C> <C>
Crude oil and NGLs (mbbls/d)....................... 21.9 21.7
Natural Gas (mmcf/d)............................... 204.0 204.0
</TABLE>
Undeveloped land holdings as at December 31, 1997 were 1,585,000 net acres.
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OVERVIEW OF DEVON
Devon is an independent energy company engaged primarily in oil and gas
exploration, development and production, and in the acquisition of producing
properties. Devon currently owns interests in approximately 1,700 oil and gas
properties concentrated in five operating areas in North America: the Permian
Basin in southeastern New Mexico and western Texas; the San Juan Basin in
northwestern New Mexico; the Rocky Mountain Region in Wyoming; the Mid-Continent
region in Oklahoma and the Texas Panhandle; and the Western Canadian Sedimentary
Basin in Alberta, Canada. As at December 31, 1997, Devon's staff consisted of
383 full-time employees. For the year ended December 31, 1997, Devon's total
revenues were U.S.$313.1 million and net income was U.S.$75.3 million.
The following table summarizes Devon's year-end proved reserves after the
deduction of royalties:
<TABLE>
<CAPTION>
December 31, 1997 December 31, 1996
----------------- -----------------
<S> <C> <C>
Crude oil and NGLs (mmbbls).......................... 81.3 80.1
Natural Gas (bcf).................................... 616.0 595.5
</TABLE>
The following table summarizes Devon's daily production of crude oil, NGLs
and gas after royalties for the periods indicated:
<TABLE>
<CAPTION>
Three Months Ended Year Ended
March 31, 1998 December 31, 1997
------------------ -----------------
<S> <C> <C>
Crude oil and NGLs (mbbls/d)....................... 23.2 23.6
Natural Gas (mmcf/d)............................... 197.2 189.9
</TABLE>
Undeveloped land holdings as at December 31, 1997 were 494,045 net acres.
FAIRNESS ANALYSIS
Approach to Fairness
RBC DS has assessed the fairness, from a financial point of view, of the
Arrangement to the holders of Northstar Shares based upon a number of factors.
These factors include:
(i) a net asset value analysis;
(ii) an analysis of multiples paid in recent comparable transactions
in the Canadian oil and gas sector;
(iii) a comparison of the consideration under the Arrangement to
recent trading levels for the Northstar Shares; and
(iv) a review of the solicitation process which included the
solicitation by the Company and Morgan Stanley of certain parties and
certain unsolicited direct approaches by parties concerning their potential
interest in merging with or making an acquisition of Northstar.
RBC DS also reviewed the trading multiples of public companies involved in
oil and gas production from the perspective of whether a public market value
analysis might exceed NAV or precedent transaction values. However, RBC DS
concluded that public company multiples implied values that were below NAV and
precedent transaction values. Given the foregoing and that public company values
generally reflect minority discount values rather than "en bloc" values, RBC DS
did not rely on this methodology.
Devon Share Consideration
In assessing the value of the Devon Exchangeable Shares being offered, RBC
DS relied primarily on the market trading value approach. Since holders of
Northstar Shares will be receiving a minority interest in Devon and will not be
able to effect a sale of 100% of Devon, we concluded it was only appropriate to
consider
J-5
<PAGE> 317
methodologies that are based on the assumption of a change of control
transaction as support to our analysis of the market trading approach.
Given that the Devon Exchangeable Shares are exchangeable on a one for one
basis for Devon Shares and given the trading history of other exchangeable
shares listed in Canada, we have used the trading value of the Devon Shares as a
proxy for the likely market trading value of the Devon Exchangeable Shares. We
believe the market price of the Devon Shares is an appropriate indicator of the
value of the Share Consideration being offered to the shareholders of Northstar
under the Arrangement, in view of the following: (i) Devon is a widely-held
company listed on the American Stock Exchange with a market capitalization of
approximately U.S.$1.2 billion. The average daily trading volume of Devon Shares
on the American Stock Exchange was 74,860 shares over the six month period ended
June 26, 1998, the last trading day prior to the announcement of the
Arrangement; (ii) Devon is well covered by equity market analysts and trades on
a comparable basis and in a manner consistent with other comparable, publicly
traded oil and gas producers in the United States, and; (iii) based upon various
analyst equity research forecasts of 1998 and 1999 cash flow and earnings for
Devon, the Arrangement, if completed, will be accretive to Devon's forecast cash
flow per share in 1998 and 1999 and earnings per share in 1999.
In addition, during our review of Devon, including meetings with Devon
management, we were not made aware of any material information regarding Devon
which has not been publicly disclosed which would reasonably be expected to
materially affect the market price of the Devon Shares.
Net Asset Value Approach
The net asset value ("NAV") approach ascribes a separate value for each
category of asset and liability utilizing the methodology appropriate in each
case; the sum of total assets less total liabilities yields the NAV. This
approach ascribes value to the proved and probable reserves existing at the time
of valuation on the basis of discounted future after-tax cash flows, and does
not anticipate the future addition of reserves through an ongoing exploration
and development program. This approach is known as a "depletion" or "blowdown"
evaluation and is a common method of evaluation of petroleum interests (reserves
and related production facilities) in the oil and gas industry. Capital
expenditures required to develop existing reserves are deducted from reserve
values. Provision is made for general and administrative expenses required to
produce the existing reserves as well as for costs associated with future well
abandonment and reclamation of sites related to such wells and associated plant
and facility equipment. In addition, a value is ascribed for other material
assets utilizing the methodology appropriate in each case.
In conducting our NAV analysis, we utilized the Hunter and Paddock
independent engineering consultants reports and applied our own views of
commodity price forecasts. We reviewed after-tax cash flows calculated based on
the engineering reports using a range of discount rates from 8% to 10%. We
applied various risk factors to the different reserve categories ranging between
50% for probable reserves and 100% for proven producing reserves.
The NAV approach, including taking into account sensitivity analyses
described above, generates values that are below or consistent with the
consideration per Northstar Share under the Arrangement.
Precedent Transactions Analysis
Based on the closing price of Devon Shares and the U.S./Canadian dollar
exchange rate on June 26, 1998 (the last trading day before the announcement of
the Arrangement) and the simple arithmetic mean of the closing price of Devon
Shares on the American Stock Exchange for the 20 trading days prior to and
including June 26, 1998 and the 20 day average U.S./Canadian dollar exchange
rate, the value to be received per Northstar Share under the Arrangement would
be $12.17 and $11.77, respectively. In addition, the Collar is estimated to add
additional value based on an option component value assessment in the range of
$0.07 to
J-6
<PAGE> 318
$0.15 per Northstar Share. Utilizing the values calculated above per Northstar
Share and a mid point of the Collar value ($0.11) yields following transaction
values:
<TABLE>
<CAPTION>
Transaction Value Transaction Value
Based Upon June 26, Based Upon 20 Day
1998 Closing Price for Average Price for
Devon Shares Devon Shares
---------------------- -----------------
($ millions)
<S> <C> <C>
Equity Value(1)................................... $ 901.4 $ 872.0
Add: Estimated Net Debt at March 31, 1997(2)...... 375.1 375.1
-------- --------
Enterprise Value.................................. $1,276.5 $1,247.1
======== ========
</TABLE>
- ---------------
NOTES:
(1) Based on 73.4 million fully diluted Northstar Shares outstanding
(2) Includes working capital surplus of $9.2 million and option proceeds of
$59.1 million
These values imply the following transaction multiples:
<TABLE>
<CAPTION>
Multiple Based Upon
Multiple Based Upon 20 Day Average
June 26, 1998 Closing Price
Amount(3) Price for Devon Shares for Devon Shares
------------ ---------------------- -------------------
($ millions)
<S> <C> <C> <C>
Enterprise Value/Forecast 1998
EBITDA(1)............................ $155.5 8.2x 8.0x
Equity Value/Forecast 1998 DCF(2)...... 127.8 7.1 6.8
Enterprise Value/Forecast 1999
EBITDA............................... 187.1 6.8 6.7
Equity Value/Forecast 1999 DCF......... 160.1 5.6 5.4
</TABLE>
- ---------------
NOTES:
(1) Earnings before interest, taxes, depreciation, depletion and amortization.
(2) Discretionary cash flow from operations prior to changes in working capital.
(3) RBC DS' 1998 forecasts for Northstar are based on management's estimates.
RBC DS' 1999 forecasts for Northstar are based on RBC DS equity research
estimates which we determined to be reasonable based on our discussions with
Northstar management.
If the Arrangement is completed, Devon will be issuing an additional 45% of
its fully diluted shares to Northstar shareholders by way of Devon Exchangeable
Shares. The issuance of the large number of Devon Exchangeable Shares may cause
some short term recycling and Devon Share price movements. The table below
outlines the impact of a +10%, +5%, -5% and -10% change in Devon Share price on
the implied transaction multiples.
<TABLE>
<CAPTION>
Multiple Based Upon
June 26, 1998
Closing Price for Devon Shares
--------------------------------
Amount(3) -10% -5% +5% +10%
------------ ------ ------ ----- ------
($ millions)
<S> <C> <C> <C> <C> <C>
Enterprise Value/Forecast 1998 EBITDA(1)............... $155.5 7.6x 7.9x 8.5 8.8x
Equity Value/Forecast 1998 DCF(2)...................... 127.8 6.3 6.7 7.4 7.8
Enterprise Value/Forecast 1999 EBITDA.................. 187.1 6.3 6.6 7.1 7.3
Equity Value/Forecast 1999 DCF......................... 160.1 5.1 5.3 5.9 6.2
</TABLE>
- ---------------
NOTES:
(1) Earnings before interest, taxes, depreciation, depletion and amortization.
(2) Discretionary cash flow from operations prior to changes in working capital.
J-7
<PAGE> 319
(3) RBC DS' 1998 forecasts for Northstar are based on management's estimates.
RBC DS' 1999 forecasts for Northstar are based on RBC DS equity research
estimates which we determined to be reasonable based on our discussions with
Northstar management.
There have been several recent oil and gas producer acquisitions in Canada
as set out below:
<TABLE>
<CAPTION>
Equity Value/ Enterprise Value/
Forecasted Forecasted
------------- -----------------
Equity Enterprise 1 Yr. 2 Yr. 1 Yr. 2 Yr. Premium to
Date Acquiror Target Value Value DCF DCF EBITDA EBITDA Market
---- --------------- --------- -------- ---------- ----- ----- ------- ------- ----------
($ millions)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Pending Marathon Tarragon $1,107.2 $1,447.2 8.2x 6.3x 9.7x 7.2x 44%
Apr-98 Dominion Energy Archer 182.4 211.1 5.4 4.3 5.7 4.6 28
Mar-98 Union Pacific Norcen 3,723.2 5,024.1 6.8 5.9 7.8 6.9 28
Feb-98 Northrock Paragon 136.5 173.4 5.4 n/a n/a n/a 26
Dec-97 Pioneer Chauvco 1,523.6 1,813.5 8.6 n/a 9.6 n/a 48
Sept-97 Gulf Stampeder 692.5 993.7 6.4 n/a 7.4 n/a 39
Apr-97 CanOxy Wascana 1,704.8 1,953.7 5.8 5.6 6.2 5.7 25
AVERAGE 6.7X 5.5X 7.7X 6.1X 34%
</TABLE>
The implied transaction multiples for Northstar under the Arrangement are
consistent with the multiples paid in precedent transactions.
Recent Trading Levels of Shares
On June 26, 1998, the last trading day prior to the announcement of the
Arrangement, the Northstar Shares and the Devon Shares closed trading on The
Toronto Stock Exchange and the American Stock Exchange at $9.75 and U.S.$36.50
per share, respectively. Utilizing a U.S./Canadian dollar exchange rate of 1.468
and a Collar value of $0.11, the value to be received per Northstar Share under
the Arrangement is $12.28, representing a premium of 25.9% to the closing price
of the Northstar Shares on such date.
The simple arithmetic mean of the closing price of the Devon Shares on the
American Stock Exchange for the 20 days prior to and including June 26, 1998 was
U.S.$35.39 per share. Using an average price per Devon Share of U.S.$35.39, a
U.S./Canadian dollar exchange rate of 1.465 and a Collar value of $0.11, the
value of the consideration to be received under the Arrangement is $11.89,
representing a premium of approximately 32.0% to the simple arithmetic mean of
the Northstar Shares closing price on The Toronto Stock Exchange for same 20 day
period. These premiums are consistent with the range of premiums for recent
takeover transactions in the oil and gas sector in Canada.
Solicitation Process
RBC DS has had discussions with both the management of Northstar and
representatives from Morgan Stanley who have indicated that approaches were made
to solicit interest from a number of parties over the past three months
concerning their willingness to propose some form of transaction and in
particular, a merger with Northstar. In addition, certain parties approached
Northstar over this period on an unsolicited basis and certain parties including
Devon were given access to confidential information. The Arrangement represents
the best alternative currently available for the Company.
J-8
<PAGE> 320
Fairness Conclusion
Based upon and subject to the foregoing, RBC DS is of the opinion that, as
of the date hereof, the Arrangement is fair from a financial point of view to
the Northstar Security Holders.
Yours very truly,
(signed) RBC DOMINION SECURITIES
INC.
RBC DOMINION SECURITIES INC.
J-9
<PAGE> 321
ANNEX K
SECTION 184 OF THE ABCA
PURSUANT TO THE INTERIM ORDER, NORTHSTAR SHAREHOLDERS AND NORTHSTAR
OPTIONHOLDERS HAVE THE RIGHT TO DISSENT IN RESPECT OF THE ARRANGEMENT. SUCH
RIGHT OF DISSENT IS DESCRIBED IN THE JOINT PROXY STATEMENT/PROSPECTUS. THE FULL
TEXT OF SECTION 184 OF THE ABCA IS SET FORTH BELOW. NOTE THAT CERTAIN PROVISIONS
OF SUCH SECTION HAVE BEEN MODIFIED BY THE INTERIM ORDER ATTACHED TO THE JOINT
PROXY STATEMENT/PROSPECTUS AS ANNEX C. IN PARTICULAR, THE WRITTEN OBJECTION
REQUIRED TO BE PROVIDED BY A DISSENTING SECURITYHOLDER TO NORTHSTAR MUST BE
RECEIVED BY NORTHSTAR C/O CIBC MELLON TRUST COMPANY AT 600-333 7TH AVENUE S.W.,
CALGARY, ALBERTA, CANADA T2P 2Z1 OR BY THE CHAIRMAN OF THE NORTHSTAR MEETING
BEFORE THE COMMENCEMENT OF THE NORTHSTAR MEETING IN ORDER TO BE EFFECTIVE, AND
THE NORTHSTAR SHAREHOLDER OR OPTIONHOLDER SHALL NOT HAVE VOTED, IN PERSON OR BY
PROXY, IN FAVOUR OF THE SPECIAL RESOLUTION APPROVING THE ARRANGEMENT.
1. Subject to sections 185 and 234, a holder of shares of any class of a
corporation may dissent if the corporation resolves to
(a) amend its articles under section 167 or 168 to add, change or
remove any provisions restricting or constraining the issue or transfer of
shares of that class,
(b) amend its articles under section 167 to add, change or remove any
restrictions on the business or businesses that the corporation may carry
on,
(c) amalgamate with another corporation, otherwise than under section
178 or 180.1,
(d) be continued under the laws of another jurisdiction under section
182, or
(e) sell, lease or exchange all or substantially all its property
under section 183.
2. A holder of shares of any class or series of shares entitled to vote
under section 170, other than section 170(1)(a), may dissent if the corporation
resolves to amend its articles in a manner described in that section.
3. In addition to any other right he may have, but subject to subsection
(20), a shareholder entitled to dissent under this section and who complies with
this section is entitled to be paid by the corporation the fair value of the
shares held by him in respect of which he dissents, determined as of the close
of business on the last business day before the day on which the resolution from
which he dissents was adopted.
4. A dissenting shareholder may only claim under this section with respect
to all the shares of a class held by him or on behalf of any one beneficial
owner and registered in the name of the dissenting shareholder.
5. A dissenting shareholder shall send to the corporation a written
objection to a resolution referred to in subsection (1) or (2)
(a) at or before any meeting of shareholders at which the resolution
is to be voted on, or
(b) if the corporation did not send notice to the shareholder of the
purpose of the meeting or of his right to dissent, within a reasonable time
after he learns that the resolution was adopted and of his right to
dissent.
[This subsection(5) has been modified by the Interim Order].
K-1
<PAGE> 322
6. An application may be made to the Court by originating notice after the
adoption of a resolution referred to in subsection (1) or (2)
(a) by the corporation, or
(b) by a shareholder if he has sent an objection to the corporation
under subsection (5),
to fix the fair value in accordance with subsection (3) of the shares of a
shareholder who dissents under this section.
7. If an application is made under subsection (6), the corporation shall,
unless the Court otherwise orders, send to each dissenting shareholder a written
offer to pay him an amount considered by the directors to be the fair value of
the shares.
8. Unless the Court otherwise orders, an offer referred to in subsection
(7) shall be sent to each dissenting shareholder
(a) at least 10 days before the date on which the application is
returnable, if the corporation is the applicant, or
(b) within 10 days after the corporation is served with a copy of the
originating notice, if a shareholder is the applicant.
9. Every offer made under subsection (7) shall
(a) be made on the same terms; and
(b) contain or be accompanied by a statement showing how the fair
value was determined.
10. A dissenting shareholder may make an agreement with the corporation for
the purchase of his shares by the corporation, in the amount of the
corporation's offer under subsection (7) or otherwise, at any time before the
Court pronounces an order fixing the fair value of the shares.
11. A dissenting shareholder
(a) is not required to give security for costs in respect of an
application under subsection (6), and
(b) except in special circumstances shall not be required to pay the
costs of the application or appraisal.
12. In connection with an application under subsection (6), the Court may
give directions for
(a) joining as parties all dissenting shareholders whose shares have
not been purchased by the corporation and for the representation of
dissenting shareholders who, in the opinion of the Court, are in need of
representation,
(b) the trial of issues and interlocutory matters, including pleadings
and examinations for discovery,
(c) the payment to the shareholder of all or part of the sum offered
by the corporation for the shares,
(d) the deposit of the share certificates with the Court or with the
corporation or its transfer agent,
(e) the appointment and payment of independent appraisers, and the
procedures to be followed by them,
(f) the service of documents, and
(g) the burden of proof on the parties.
K-2
<PAGE> 323
13. On an application under subsection (6), the Court shall make an order
(a) fixing the fair value of the shares in accordance with subsection
(3) of all dissenting shareholders who are parties to the application,
(b) giving judgment in that amount against the corporation and in
favour of each of those dissenting shareholders, and
(c) fixing the time within which the corporation must pay that amount
to a shareholder.
14. On
(a) the action approved by the resolution from which the shareholder
dissents becoming effective,
(b) the making of an agreement under subsection (10) between the
corporation and the dissenting shareholder as to the payment to be made by
the corporation for his shares, whether by the acceptance of the
corporation's offer under subsection (7) or otherwise, or
(c) the pronouncement of an order under subsection (13),
whichever first occurs, the shareholder ceases to have any rights as a
shareholder other than the right to be paid the fair value of his shares in the
amount agreed to between the corporation and the shareholder or in the amount of
the judgment, as the case may be.
15. Subsection (14)(a) does not apply to a shareholder referred to in
subsection (5)(b).
16. Until one of the events mentioned in subsection (14) occurs,
(a) the shareholder may withdraw his dissent, or
(b) the corporation may rescind the resolution, and in either event
proceedings under this section shall be discontinued.
17. The Court may in its discretion allow a reasonable rate of interest on
the amount payable to each dissenting shareholder, from the date on which the
shareholder ceases to have any rights as a shareholder by reason of subsection
(14) until the date of payment.
18. If subsection (20) applies, the corporation shall, within 10 days after
(a) the pronouncement of an order under subsection (13), or
(b) the making of an agreement between the shareholder and the
corporation as to the payment to be made for his shares,
notify each dissenting shareholder that it is unable lawfully to pay dissenting
shareholders for their shares.
19. Notwithstanding that a judgment has been given in favour of a
dissenting shareholder under subsection (13)(b), if subsection (20) applies, the
dissenting shareholder, by written notice delivered to the corporation within 30
days after receiving the notice under subsection (18), may withdraw his notice
of objection, in which case the corporation is deemed to consent to the
withdrawal and the shareholder is reinstated to his full rights as a
shareholder, failing which he retains a status as a claimant against the
corporation, to be paid as soon as the corporation is lawfully able to do so or,
in a liquidation, to be ranked subordinate to the rights of creditors of the
corporation but in priority to its shareholders.
20. A corporation shall not make a payment to a dissenting shareholder
under this section if there are reasonable grounds for believing that
(a) the corporation is or would after the payment be unable to pay its
liabilities as they become due, or
(b) the realizable value of the corporation's assets would thereby be
less than the aggregate of its liabilities.
K-3
<PAGE> 324
[Pages L-1 through L-72
consist of Devon's Annual Report on Form
10-K for the year ended December 31, 1997 filed
with the SEC on March 13, 1998]
[Pages L-73 through L-96
consist of Devon's Quarterly Report on Form
10-Q for the quarter ended June 30, 1998, filed
with the SEC on August 6, 1998]
[Pages L-97 through L-99
consist of the first amendment to Devon's
Quarterly Report on Form 10-Q for the
quarter ended June 30, 1998, filed with the
SEC on October 14, 1998]
[Pages L-100 through L-118
consist of the Proxy Statement for Devon's
1998 Annual Meeting of Stockholders filed
with the SEC on March 30, 1998]
<PAGE> 325
NORTHSTAR ENERGY LOGO
3000, 400 - 3RD AVENUE S.W.
CALGARY, ALBERTA T2P 4H2
TELEPHONE: (403) 213-8000
FAX: (403) 213-8100
NORTHSTAR ENERGY CORPORATION
REVISED ANNUAL INFORMATION FORM
FOR THE YEAR ENDED
DECEMBER 31, 1997
MAY 15, 1998
L-119
<PAGE> 326
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
GLOSSARY OF ABBREVIATIONS AND TERMS......................... L-121
INCORPORATION AND CORPORATE STRUCTURE....................... L-122
BUSINESS OF THE CORPORATION................................. L-122
General................................................... L-122
Description of the Business and Recent Developments....... L-122
Financing Activities...................................... L-124
PETROLEUM AND NATURAL GAS OPERATIONS........................ L-125
Principle Oil and Gas Properties.......................... L-125
Petroleum and Natural Gas Reserves........................ L-126
Continuity of Reserves.................................... L-128
Undeveloped Land.......................................... L-128
Drilling Activity......................................... L-129
Oil and Natural Gas Wells................................. L-129
Capital Expenditures...................................... L-129
SELECTED CONSOLIDATED FINANCIAL INFORMATION AND PRODUCTION
HISTORY................................................... L-130
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF
OPERATIONS AND FINANCIAL CONDITION........................ L-131
MARKET FOR THE SECURITIES OF THE CORPORATION................ L-131
DIVIDEND POLICY............................................. L-131
DIRECTORS AND OFFICERS OF THE CORPORATION................... L-131
INDUSTRY CONDITIONS......................................... L-133
Marketing................................................. L-133
Competitive Conditions.................................... L-134
Royalties and Incentives.................................. L-134
Industry Regulation....................................... L-135
ADDITIONAL INFORMATION...................................... L-136
</TABLE>
L-120
<PAGE> 327
GLOSSARY OF ABBREVIATIONS AND TERMS
In this Revised Annual Information Form, the following abbreviations and
terms have the indicated meanings:
<TABLE>
<S> <C>
CRUDE OIL AND NATURAL GAS LIQUIDS
- ----------------------------------------------------
bbls................. barrels
bbls/d............... barrels per day
mbbls................ thousands of barrels
mmbbls............... millions of barrels
NATURAL GAS
- ----------------------------------------------------
mcf.................. thousand cubic feet
mmcf................. million cubic feet
mmcf/d............... million cubic feet per day
bcf.................. billion cubic feet
mmbtu................ million British Thermal Units
</TABLE>
"Annual Report" the Annual Report of the Corporation for the fiscal
year ended December 31, 1997.
"ARTC" Alberta Royalty Tax Credit.
"Fund" Morrison Facilities Income Fund.
"Hunter Report" a report of the Corporation's crude oil, natural gas
and natural gas liquids reserves, dated February 27,
1998, which relates to the properties of the
Corporation held by Northstar prior to the business
combination with Morrison Petroleums, prepared by
John P. Hunter & Associates Ltd., independent
petroleum engineering consultants, Calgary, Alberta.
"Management's Discussion
and
Analysis" Management's Discussion and Analysis of Results of
Operations and Financial Condition, set forth on
pages 20 through 32 of the Annual Report.
"MMRL" Morrison Middlefield Resources Limited.
"Morrison Petroleums" Morrison Petroleums Ltd., which became a
wholly-owned subsidiary of the Corporation in March
1997, following completion of a business combination
undertaken by way of take-over bid.
"Mountain Energy" Mountain Energy Inc., a corporation of which 50% of
the outstanding shares are held by Morrison
Petroleums and 50% by MMRL.
"Northstar" or the
"Corporation" Northstar Energy Corporation.
"Northstar Energy" Northstar Energy partnership, of which Northstar and
Morrison Petroleums are the sole partners.
"Paddock Lindstrom Report
1" A report of the Corporation's crude oil, natural gas
and natural gas liquids reserves, dated February 4,
1998, which relates to the properties of the
Corporation previously held by Morrison Petroleums
prior to the business combination with Northstar,
prepared by Paddock Lindstrom & Associates Ltd.,
independent petroleum engineering consultants,
Calgary, Alberta.
"Paddock Lindstrom Report
2" A report of Mountain Energy's crude oil, natural gas
and natural gas liquids reserves, dated February 4,
1998, prepared by Paddock Lindstrom & Associates
Ltd.
Unless otherwise indicated, all dollar amounts set forth in this Revised
Annual Information Form are stated in Canadian dollars.
L-121
<PAGE> 328
INCORPORATION AND CORPORATE STRUCTURE
Northstar was incorporated under the laws of the Province of Alberta on
November 3, 1981 and was continued under the Business Corporations Act (Alberta)
in July 1985. The Corporation commenced operations in 1982 and carried on
business under the name "Gane Energy Corporation Ltd." until June 1986, at which
time its name was changed to "Northstar Energy Corporation". In August 1982, the
common shares of the Corporation commenced trading on The Toronto Stock Exchange
and The Alberta Stock Exchange and in April 1997, the common shares were listed
on the Montreal Exchange. The head and principal office of the Corporation is
located at 3000, 400 -- 3rd Avenue S.W., Calgary, Alberta T2P 4H2. In March
1997, the Corporation completed a business combination with Morrison Petroleums,
pursuant to which the Corporation acquired all of the outstanding shares of
Morrison Petroleums. The business combination was undertaken by way of take-over
bid and has been accounted for using the pooling of interests method of
accounting.
On November 1, 1997, Northstar, Morrison Petroleums and a number of other
Northstar subsidiaries entered into a partnership agreement pursuant to which
each partner conveyed most of its oil and gas business to the partnership,
Northstar Energy. As of February 1, 1998, the only partners of Northstar Energy
were Northstar and Morrison Petroleums.
Morrison Petroleums is the only material operating subsidiary of Northstar.
Northstar holds 100% of the voting securities of Morrison Petroleums. Morrison
Petroleums was incorporated under the laws of the Province of Alberta.
BUSINESS OF THE CORPORATION
GENERAL
Northstar is, directly and indirectly through Northstar Energy and
Morrison, actively engaged in the business of petroleum and natural gas
exploration, development, production and marketing. Northstar's oil and gas
operations are concentrated primarily within the Province of Alberta. As at
December 31, 1997, the Corporation had approximately 450 employees, 215 of whom
were head office employees and 235 of whom were field personnel.
DESCRIPTION OF THE BUSINESS AND RECENT DEVELOPMENTS
Commencing in 1986, the Corporation implemented a business plan having, as
its primary focus, the development of core areas of operation in specific
regions. That business plan emphasized the integration of the Corporation's
exploration, production, processing and marketing activities. This regional
approach has been and continues to be considered by Northstar to be a key
strategy for establishing economies of scale in core areas, thereby creating
opportunities to add incremental reserves on an economic basis and to produce
oil and natural gas in a low cost manner. The Corporation has historically
focused its efforts on the natural gas sector of the industry. While the
Corporation has become a balanced producer in recent years, with crude oil and
natural gas liquids production accounting for approximately 51% of total
production in 1997, exploration and development expenditures and total reserves
have continued to be weighted strongly to the natural gas sector.
Through its regional approach, the Corporation has developed six core
regions of operations. These core regions consist of the Smoky Bear and
Hangingstone areas in northern Alberta, the Hamburg and Chinchaga areas in
northwestern Alberta, the Gull Lake and Wizard Lake areas in west central
Alberta, the David and Bellshill areas in east central Alberta, the Turin area
in southern Alberta and the Coleman area in the southern Foothills region of
Alberta. In addition, Northstar entered into a joint venture with Amoco Canada
Petroleum Company Ltd. in October 1997. Under that arrangement, Northstar will
spend $15 million per year for a three year period ending March 30, 2001 to earn
a 49% working interest in over 600,000 acres in the northeastern British
Columbia Foothills region (see "Petroleum and Natural Gas Operations").
Production of natural gas and oil and natural gas liquids has grown at
average annual rates of 40.3% and 91.6%, respectively, over the five year period
ended December 31, 1997. During the same five year period,
L-122
<PAGE> 329
proved and probable (discounted at 50%) reserve additions from exploration,
development and property acquisitions have averaged approximately 288% of
production.
On February 13, 1997, the Corporation announced its intention to make an
offer to purchase all of the outstanding shares of Morrison Petroleums. The
offer was made on February 21, 1997, on the basis that each holder of Morrison
Petroleums shares who accepted the offer would receive 0.7 common shares of
Northstar for each share of Morrison Petroleums. Effective March 14, 1997, the
Corporation purchased approximately 96.8% of the outstanding shares of Morrison
Petroleums. The remaining Morrison Petroleums shares were subsequently acquired
by the Corporation pursuant to the compulsory acquisition provisions of the
Business Corporations Act (Alberta). The business combination between Northstar
and Morrison Petroleums provided Northstar with the opportunity to increase its
asset base in the Corporation's core areas of activity and, with the acquisition
of Morrison Petroleums' 875,000 net acres of undeveloped land, added a
significant land base for future development. In addition, the Morrison
Petroleums properties provided significant natural gas exploration and
exploitation opportunities in the high reward southern Alberta Foothills area
and northern Alberta shallow gas plays. See "Petroleum and Natural Gas
Operations".
In March 1997, the Corporation initiated a $300 million issuer bid to
purchase a number of its outstanding common shares utilizing a dutch auction
procedure. The issuer bid expired on April 15, 1997, at which time the
Corporation purchased approximately 20.7 million of its outstanding common
shares, at a purchase price of $14.50 per share. As a result of the issuer bid,
the number of outstanding common shares of the Corporation was reduced to
approximately 67.6 million. The issuer bid was financed through cash on hand and
a new revolving credit facility (see "New Financing").
Prior to the acquisition by Northstar of Morrison Petroleums, Morrison
Petroleums sold its 100% interest in both the Nevis gas plant and a crude oil
pipeline system in northeastern British Columbia to the Fund for net proceeds of
$178.8 million. The Fund, which raised the proceeds through a public offering of
trust units, is an unincorporated trust governed by the laws of Alberta.
Northstar currently manages and administers the Fund. On January 27, 1998,
Northstar and the Fund jointly announced their intention to appoint a new
manager of the Fund to replace Northstar. It is the Corporation's belief that
management of the Fund is not aligned with the Corporation's fundamental
business strategy of focused oil and gas operations. The new manager is expected
to be appointed prior to June 1, 1998.
Northstar directly and indirectly owns 4,216,740 common shares of MMRL, a
public oil and gas company, the shares of which are listed on The Toronto Stock
Exchange. MMRL is engaged in the exploration for and the development of oil and
gas reserves in western Canada and the United Kingdom. The shares controlled by
Northstar represent approximately 21.5% of the issued and outstanding shares of
MMRL. In addition, the Corporation holds options to purchase an additional
1,189,732 common shares of MMRL at a price of $5.00 per share. Northstar is a
co-manager of MMRL and receives management fees for services provided to MMRL.
Consistent with Northstar's strategy of focusing its efforts and resources on
its oil and natural gas exploration and development activities, Northstar filed
a notice of intention to sell its shares of MMRL with various securities
commissions and the Alberta, Toronto and Montreal stock exchanges on March 26,
1998. On April 9, 1998, the Corporation sold 100 shares of MMRL pursuant to the
notice of intention so as to ensure such notice would not lapse.
Morrison and MMRL each own 50% of the outstanding shares of Mountain
Energy, a private oil and gas company, with assets located primarily in east
central Alberta. In 1997, Mountain Energy produced an average of 3 mbbls/d of
oil and natural gas liquids and 12 mmcf/d of natural gas.
On May 11, 1998, the Corporation entered into an agreement with MMRL
wherein Northstar will acquire MMRL's 50% share of Mountain Energy in exchange
for the shares and options of MMRL owned by Northstar. The agreement is subject
to certain approvals and conditions including the approval of the Toronto and
Montreal stock exchanges and other regulatory authorities. If such approvals are
obtained, the transaction is expected to close July 31, 1998 with a June 30,
1998 effective date.
In March 1998, Northstar sold its 48% interest in West Windsor Power, an
Ontario general partnership, to one of its partners, Tractebel Canada Ltd. for
$72.3 million. The sole asset of West Windsor Power is a 109
L-123
<PAGE> 330
megawatt cogeneration facility located in Windsor, Ontario. The proceeds of the
sale were used to retire a portion of the Corporation's long term bank debt.
On April 3, 1998, the Corporation announced that it had agreed to sell (and
the Corporation has since sold) $75 million of non-core properties. The
dispositions, which include approximately 3,800 barrels of oil equivalent per
day of production, were undertaken to upgrade the overall quality of the
Corporation's assets and to enhance its concentration on the natural gas sector.
A large portion of the assets sold were crude oil properties having decline
rates and operating costs significantly in excess of Northstar's corporate
average.
FINANCING ACTIVITIES
In 1997, Northstar arranged an extendible revolving term credit facility in
the amount of $300 million with a syndicate of Canadian banks and a separate $60
million extendible operating facility with a Canadian chartered bank. These
facilities are unsecured and are renewable annually by mutual consent. In the
event any of these facilities is not renewed by the lenders, any borrowings
become repayable over a period of up to 66 months. As at December 31, 1997,
aggregate borrowings under the facilities were $312.2 million. Of the $312.2
million drawn, $235 million was used to fund the $300 million issuer bid
completed in April 1997.
In March 1998, Northstar completed an unsecured, long-term senior notes
financing in the amount of US$150 million, due 2009. Proceeds from the notes,
which are repayable in three annual instalments of US$50 million commencing in
2007 and bear interest at 6.79% per annum, were used to repay US$60 million of
previously outstanding 7.03% senior notes and to reduce existing bank debt.
US$75 million senior notes, bearing interest at 6.76% per annum due July 2005,
remains outstanding.
As of March 31, 1998, Northstar's long term indebtedness was approximately
$443 million.
L-124
<PAGE> 331
PETROLEUM AND NATURAL GAS OPERATIONS
PRINCIPAL OIL AND GAS PROPERTIES
The following table sets forth information respecting the principal oil and
natural gas properties and facilities owned by the Northstar Energy, Northstar
and Morrison Petroleums and the working interest in each property and facility.
Information presented is as at December 31, 1997.
<TABLE>
<CAPTION>
AVERAGE(1)
WORKING
REGION PRINCIPAL PROPERTIES INTEREST MAJOR FACILITIES
------ -------------------- ---------- ----------------
<S> <C> <C> <C>
North Wolverine 94 Northstar has interests in and operates eight
Goodfish 85 compression facilities in the North Region which
Surmont West 70 have gross processing capacities ranging from 12
Surmont 61 mmcf/d to 56 mmcf/d.
Hangingstone 72
Tepee 50
Trout 100
- -----------------------------------------------------------------------------------------------------------
Northwest Hamburg 73 Northstar has a 100% working interest in a sweet
Chinchaga 72 gas plant with liquids recovery in the Chinchaga
area and a 60% working interest in the Hamburg gas
plant. The gross capacity of the plants is 26
mmcf/d and 33 mmcf/d respectively.
- -----------------------------------------------------------------------------------------------------------
East Central Bellshill 100 Northstar has no significant single facility in
David 100 east central Alberta.
Halkirk 79
Thompson Lake 38
- -----------------------------------------------------------------------------------------------------------
West Central Gilby 94 Northstar has 100% working interests in the Wizard
Gull Lake 95 Lake and Gull Lake gas plants and a 60% working
Hanlan Robb 5.6 interest in the Eta Lake sour gas plant. The gross
Olds 81 capacity for these plants is 30 mmcf/d, 16 mmcf/d
and 12 mmcf/d respectively.
- -----------------------------------------------------------------------------------------------------------
South Grand Forks 63 Northstar has a 72.3% working interest in the
Retlaw East 87 Turin gas plant, an 83.5% working interest in the
Retlaw 81 Retlaw gas plant and a 100% working interest in
Hays 85 the Long Coulee gas plant. The gross capacity for
Turin 71 these plants is 44 mmcf/d, 15 mmcf/d and 13 mmcf/d
respectively.
- -----------------------------------------------------------------------------------------------------------
Foothills Coleman 90 Northstar has a 100% working interest in the
Coleman sour gas plant which has a gross capacity
of 100 mmcf/d.
</TABLE>
- ---------------
Notes:
(1) Indicates the Corporation's average working interest in its producing
properties in the area
L-125
<PAGE> 332
PETROLEUM AND NATURAL GAS RESERVES
The following tables collectively summarize, as at December 31, 1997, the
reserve evaluations contained in the Hunter Report, Paddock Lindstrom Report 1
and Paddock Lindstrom Report 2. Northstar owned 50% of the outstanding shares of
Mountain Energy and therefore 50% of the total reserves contained in the Paddock
Lindstrom Report 2 were used in the summary tables below.
OIL, NATURAL GAS AND NATURAL GAS LIQUIDS RESERVES
(BASED UPON ESCALATED PRICES AND COSTS)(7)
<TABLE>
<CAPTION>
OIL NATURAL GAS LIQUIDS NATURAL GAS
------------------- ------------------- -----------------
RESERVE CATEGORY GROSS(1) NET(2) GROSS(1) NET(2) GROSS(1) NET(2)
- ---------------- -------- -------- -------- -------- -------- ------
(MMBBLS) (MMBBLS) (MMBBLS) (MMBBLS) (BCF) (BCF)
<S> <C> <C> <C> <C> <C> <C>
Proved producing(3) 36.9 31.6 5.1 3.9 491.0 404.0
Proved non-producing(4)(9) 5.6 5.1 0.9 0.7 187.7 160.9
---- ---- --- --- ----- -----
Total proved(5) 42.5 36.7 6.0 4.6 678.7 564.9
50% of probable additional(6)(9) 8.4 7.0 0.6 0.4 120.6 101.7
---- ---- --- --- ----- -----
Total proved plus 50% of probable
additional(10) 50.9 43.7 6.6 5.0 799.3 666.6
==== ==== === === ===== =====
</TABLE>
ESTIMATED FUTURE NET CASH FLOW
(BASED UPON ESCALATED PRICES AND COSTS)(7)
($MILLIONS)
<TABLE>
<CAPTION>
DISCOUNTED AT
-----------------------------
RESERVE CATEGORY UNDISCOUNTED 10% 15% 20%
- ---------------- ------------ ------- ------- -------
<S> <C> <C> <C> <C>
Proved producing(3) 1,407.4 823.7 691.9 600.6
Proved non-producing(4)(9) 201.1 149.9 115.3 91.7
ARTC 23.1 10.4 8.4 7.2
------- ------- ------- -------
Total proved(5) 1,631.4 984.0 815.6 699.5
50% of probable additional(6)(9) 332.2 131.5 97.5 75.8
ARTC 3.8 0.2 0.1 0.1
------- ------- ------- -------
Total proved plus 50% of probable additional(10) 1,967.4 1,115.7 913.2 775.4
======= ======= ======= =======
</TABLE>
OIL, NATURAL GAS AND NATURAL GAS LIQUIDS RESERVES
(BASED UPON CONSTANT PRICES AND COSTS)(8)
<TABLE>
<CAPTION>
OIL NATURAL GAS LIQUIDS NATURAL GAS
------------------- ------------------- -----------------
RESERVE CATEGORY GROSS(1) NET(2) GROSS(1) NET(2) GROSS(1) NET(2)
- ---------------- -------- -------- -------- -------- -------- ------
(MMBBLS) (MMBBLS) (MMBBLS) (MMBBLS) (BCF) (BCF)
<S> <C> <C> <C> <C> <C> <C>
Proved producing(3) 35.2 30.1 5.1 3.9 490.0 392.7
Proved non-producing(4)(9) 1.9 1.6 0.9 0.7 186.9 157.4
---- ---- --- --- ----- -----
Total proved(5) 37.1 31.7 6.0 4.6 676.9 550.1
50% of probable additional(6)(9) 6.8 5.3 0.6 0.4 120.0 100.0
---- ---- --- --- ----- -----
Total proved plus 50% of probable
additional(10) 43.9 37.0 6.6 5.0 796.9 650.1
==== ==== === === ===== =====
</TABLE>
L-126
<PAGE> 333
ESTIMATED FUTURE NET CASH FLOW
(BASED UPON CONSTANT PRICES AND COSTS)(8)
($MILLIONS)
<TABLE>
<CAPTION>
DISCOUNTED AT
---------------------
RESERVE CATEGORY UNDISCOUNTED 10% 15% 20%
- ---------------- ------------ ----- ----- -----
<S> <C> <C> <C> <C>
Proved producing(3) 931.6 626.0 545.4 486.2
Proved non-producing(4)(9) 161.4 89.7 71.5 58.5
ARTC 36.0 15.3 11.9 9.6
------- ----- ----- -----
Total proved(5) 1,129.0 731.0 628.8 554.4
50% of probable additional(6)(9) 165.2 79.0 60.7 48.2
ARTC 4.0 0.6 0.3 0.2
------- ----- ----- -----
Total proved plus 50% of probable additional(10) 1,298.2 810.6 689.8 602.8
======= ===== ===== =====
</TABLE>
- ---------------
Notes:
(1) "Gross" reserves means the total working and royalty interest share of
recoverable reserves owned by the Corporation before deduction of royalties
payable to others.
(2) "Net" reserves means the Corporation's gross reserves less all royalties
payable to others.
(3) "Proved producing" reserves are those proved reserves that are actually on
production or, if not producing, that could be recovered from existing wells
or facilities and where the reasons for the current non-producing status is
owner choice rather than the lack of markets or some other reason.
(4) "Proved non-producing" reserves are those proved reserves that are not
currently producing due to lack of facilities and/or markets.
(5) "Proved" reserves are defined as those reserves estimated as recoverable,
under current technology and existing economic conditions, from that portion
of a reservoir which can be reasonably evaluated as economically productive
on the basis of analysis of drilling, geological, geophysical and
engineering data, including the reserves to be obtained by enhanced recovery
processes demonstrated to be economic and technically successful in the
subject reservoir.
(6) "Probable additional" reserves are those reserves which analysis of
drilling, geological, geophysical and engineering data does not demonstrate
to be proved under current technology and existing economic conditions, but
where such analysis suggests the likelihood of their existence and future
recovery. Probable additional reserves to be obtained by the application of
enhanced recovery processes will be the increased recovery over and above
the estimated reserves in the proved category which can be realistically
estimated for the pool on the basis of enhanced recovery processes which can
be reasonably expected to be instituted in the future. THE PROBABLE
ADDITIONAL RESERVES AND VALUES PRESENTED ABOVE HAVE BEEN REDUCED BY 50% TO
TAKE INTO ACCOUNT THE RISK FACTORS ASSOCIATED WITH THE RECOVERY THEREOF.
(7) The escalated price and cost assumptions assume the continuance of current
laws and regulations and increases in wellhead selling prices, and take into
account inflation with respect to future operations and capital costs. THERE
CAN BE NO ASSURANCE THAT THE ESCALATED PRICE AND COST ASSUMPTIONS UTILIZED
WILL BE ATTAINED AND VARIANCES FROM ACTUAL PRICES AND COSTS COULD BE
MATERIAL. Crude oil and natural gas prices and operating and capital cost
inflation are forecast as follows:
<TABLE>
<CAPTION>
OPERATING COST AND
NATURAL GAS CRUDE OIL CAPITAL INFLATION
($/MMBTU) ($/BBL)(A) %
----------- ---------- ------------------
<S> <C> <C> <C>
1998 1.80 25.00 0
1999 2.00 27.00 2
2000 2.20 29.00 2
2001 2.35 30.50 3
2002 2.45 32.00 3
2003 2.60 32.96 3
</TABLE>
(a) Edmonton posted price for light crude oil.
(8) The constant price and cost assumptions are based on average wellhead prices
of $1.85 per mmbtu for natural gas and $25.32 per bbl at Edmonton for crude
oil and operating costs and royalties in effect in December 1997, and assume
the continuance of current laws and regulations. No provision has been made
for inflation of prices or costs.
L-127
<PAGE> 334
(9) The Corporation's share of future capital costs required to achieve future
production and net cash flows is estimated as follows:
<TABLE>
<CAPTION>
ESCALATED CONSTANT
PRICE AND COST PRICE AND COST
ASSUMPTION ASSUMPTIONS
--------------------- ---------------------
PROVED + PROVED +
50% 50%
PROVED PROBABLE PROVED PROBABLE
------ -------- ------ --------
($ MILLIONS)
<S> <C> <C> <C> <C>
1998 29.2 38.7 27.8 37.3
1999 20.3 28.9 14.7 22.7
Thereafter 13.2 25.1 6.4 14.5
---- ---- ---- ----
Total 62.7 92.7 48.9 74.5
==== ==== ==== ====
</TABLE>
(10) Numbers may not add due to rounding.
CONTINUITY OF RESERVES
The following table provides a summary of changes in reserves for the year
ended December 31, 1997. The properties acquired through the merger with
Morrison Petroleums have been thoroughly evaluated and, consistent with
Northstar's corporate approach to booking reserves, certain revisions have been
recorded effective January 1, 1997. The reserves presented were determined based
on escalated prices and costs, which do not materially differ from reserves
determined using constant prices and costs.
<TABLE>
<CAPTION>
BEFORE ROYALTIES NET OF ROYALTIES
---------------------------- ----------------------------
50% OF 50% OF
PROVED PROBABLE(1) TOTAL PROVED PROBABLE(1) TOTAL
------ ----------- ----- ------ ----------- -----
<S> <C> <C> <C> <C> <C> <C>
Oil and natural gas liquids (mmbbls)
Balance, January 1, 1997 49.1 5.0 54.1 40.6 3.8 44.5
Additions(2) 7.3 4.0 11.3 7.0 3.5 10.5
Production (7.9) -- (7.9) (6.3) (6.3)
----- ----- ----- ----- ----- -----
Balance, December 31, 1997 48.5 9.0 57.5 41.3 7.4 48.7
===== ===== ===== ===== ===== =====
Natural gas (bcf)
Balance, January 1, 1997 581.0 95.0 676.0 483.0 80.0 563.0
Additions(2) 172.0 25.5 197.5 143.0 22.0 165.0
Production (74.0) -- (74.0) (61.0) (61.0)
----- ----- ----- ----- ----- -----
Balance, December 31, 1997 679.0 120.5 799.5 565.0 102.0 667.0
===== ===== ===== ===== ===== =====
</TABLE>
- ---------------
Notes:
(1) Probable additional reserves have been reduced by 50% to take into account
the risk factors associated with the recovery thereof.
(2) Additions are net of dispositions and include the impact of revisions.
UNDEVELOPED LAND
As at December 31, 1997, the Corporation held interests in undeveloped
petroleum and natural gas leases and rights as outlined in the following table.
<TABLE>
<CAPTION>
GROSS ACRES(1) NET ACRES(2)
LOCATION (THOUSANDS) (THOUSANDS)
-------- -------------- ------------
<S> <C> <C>
Alberta 2,017.4 1,446.1
British Columbia 125.8 97.6
Saskatchewan 42.8 41.3
------- -------
Total 2,186.0 1,585.0
======= =======
</TABLE>
- ---------------
Notes:
(1) "Gross" acres means the number of acres in which the Corporation has a
working interest.
L-128
<PAGE> 335
(2) "Net" acres means the aggregate number of acres obtained by multiplying the
gross acres in each property by the Corporation's percentage working
interest therein.
DRILLING ACTIVITY
The summary of drilling activity of the Corporation during the years ended
December 31, 1997 and 1996, set forth on page 27 of the Annual Report, is
incorporated herein by reference and forms a part of this Revised Annual
Information Form.
OIL AND NATURAL GAS WELLS
The following table summarizes the Corporation's interests, as at December
31, 1997, in producing wells and in non-producing wells that the Corporation
believes are capable of commercial production of oil or natural gas. The wells
included in the table accounted for substantially all of the total value of the
Corporation's reserves as at December 31, 1997.
<TABLE>
<CAPTION>
PRODUCING OIL WELLS PRODUCING GAS WELLS SHUT-IN GAS WELLS(1)
------------------- ------------------- ---------------------
GROSS(2) NET(3) GROSS(2) NET(3) GROSS(2) NET(3)
-------- ------ -------- ------ --------- -------
<S> <C> <C> <C> <C> <C> <C>
Alberta 1,505 530 662 315 122 81
Saskatchewan 16 10 2 1 1 1
British Columbia 1 1 3 2 7 3
----- --- --- --- --- ---
1,522 541 667 318 130 85
===== === === === === ===
</TABLE>
- ---------------
Notes:
(1) "Shut-in" wells are wells that are capable of economic production or that
the Corporation considers capable of production but which, for a variety of
reasons, including but not limited to lack of markets or development, are
not on production at the present time. All shut-in wells to which reserves
have been assigned are located within 10 miles of pipeline facilities.
(2) "Gross" wells means the number of wells in which the Corporation has a
working interest or royalty interest.
(3) "Net" wells means the aggregate number of wells obtained by multiplying each
gross well by the Corporation's percentage interest therein and are, in some
cases, subject to adjustment after payout.
CAPITAL EXPENDITURES
The summary of net capital expenditures of the Corporation during the years
ended December 31, 1997 and 1996 set forth on page 27 of the Annual Report, is
incorporated herein by reference and forms a part of this Revised Annual
Information Form.
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<PAGE> 336
SELECTED CONSOLIDATED FINANCIAL INFORMATION AND PRODUCTION HISTORY
The following tables set forth selected financial results and production
history for the Corporation for the financial years indicated on a pooled basis.
<TABLE>
<CAPTION>
POOLED(1) -- YEARS ENDED DECEMBER 31
-------------------------------------------------
1997 1996 1995 1994 1993
-------- -------- ------- ------- -------
($ MILLIONS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C>
Financial
Revenue (net of royalties) $ 266.2 $ 293.7 $ 236.5 $ 197.1 $ 151.6
Net earnings 50.1 62.1 36.6 43.4 36.9
Earnings per common share(2)
-- basic 0.68 0.72 0.45 0.56 0.53
-- fully diluted 0.66 0.70 0.44 0.55 0.52
Cash flow from operations 167.0 205.3 157.1 146.1 112.5
Cash flow from operations per common share(2)
-- basic 2.26 2.39 1.93 1.89 1.63
-- fully diluted 2.17 2.27 1.85 1.82 1.55
Total assets 1,178.2 1,244.9 924.8 683.8 516.9
Long term debt 435.1 184.9 210.5 18.5 36.8
Shareholders' equity 392.1 638.1 521.7 478.3 340.0
Production history(3)
Natural gas (mmcf/d) 204 213 188 131 97
Oil and natural gas liquids (bbls/d) 21,700 23,900 22,500 17,900 14,600
</TABLE>
- ---------------
Notes:
(1) Pooled numbers represent the combined operations of Northstar and Morrison
prepared on a "pooling of interests" basis.
(2) The figure for "Earnings per common share" was calculated by dividing "Net
earnings" by the weighted average number of common shares outstanding.
Similarly, the figure for "Cash flow from operations per common share" was
calculated by dividing "Cash flow from operations" by the weighted average
number of common shares outstanding. The weighted average number of common
shares outstanding for 1997, computed on a pooling of interests basis, was
73,505,000, for 1996 was 85,832,000, for 1995 was 81,270,000, for 1994 was
77,243,000 and for 1993 was 69,063,000.
(3) Production history reflects the Corporation's net working interests, before
deduction of royalties.
The following tables set forth selected financial results for the
Corporation for the eight consecutive quarterly periods ended December 31, 1997.
<TABLE>
<CAPTION>
1997 FISCAL YEAR (POOLED)(1)
THREE MONTHS ENDED
-----------------------------------------------
MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31
-------- ------- ------------ -----------
($ MILLIONS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C>
Revenues (net of royalties) $70.6 $58.7 $65.3 $71.6
Net earnings 37.9 3.1 5.1 4.0
Earnings per common share
-- basic 0.44 0.08 0.09 0.07
-- fully diluted 0.42 0.08 0.09 0.07
</TABLE>
<TABLE>
<CAPTION>
1996 FISCAL YEAR (POOLED)(1)
THREE MONTHS ENDED
-----------------------------------------------
MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31
-------- ------- ------------ -----------
($ MILLIONS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C>
Revenues (net of royalties) $70.1 $70.3 $68.9 $84.4
Net earnings 11.7 11.3 11.3 27.8
Earnings per common share
-- basic 0.14 0.13 0.13 0.32
-- fully diluted 0.14 0.12 0.13 0.31
</TABLE>
- ---------------
(1) Pooled numbers represent the combined operations of Northstar and Morrison
prepared on a "pooling of interests" basis.
L-130
<PAGE> 337
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
Management's Discussion and Analysis of Results of Operations and Financial
Condition, set forth on pages 20 through 32 of the Annual Report, and the
Financial Statements of the Corporation for the years ended December 31, 1997
and 1996, set forth on pages 33 through 45 of the Annual Report, are
incorporated herein by reference and form a part of this Revised Annual
Information Form.
MARKET FOR THE SECURITIES OF THE CORPORATION
During the year ended December 31, 1997, Northstar's common shares were
listed on The Toronto Stock Exchange and The Alberta Stock Exchange, under the
trading symbol "NEN". In April 1997, the common shares also commenced trading on
the Montreal Exchange.
DIVIDEND POLICY
To date, the Corporation has not paid any dividends on its outstanding
common shares. Prior to 1992, the Corporation paid dividends on preferred shares
that were outstanding at that time, however, no preferred shares are currently
issued or outstanding. Except for dividends paid on preferred shares, net
earnings and discretionary cash flow otherwise available for the payment of
dividends have been consistently reinvested to finance the development and
growth of the Corporation. The future payment of dividends will be determined by
the board of directors of the Corporation based upon a number of factors
including, but not limited to, financing requirements for future capital
investment, available net earnings and cash flow and the financial condition of
the Corporation.
DIRECTORS AND OFFICERS OF THE CORPORATION
The names, municipalities of residence, offices held with the Corporation,
present principal occupations and principal occupations during the last five
years of the current directors and officers of the Corporation are set forth
below.
<TABLE>
<CAPTION>
DIRECTORS
NAME AND MUNICIPALITY PRESENT PRINCIPAL OCCUPATION AND
OF RESIDENCE DIRECTOR SINCE PRINCIPAL OCCUPATIONS DURING THE LAST FIVE YEARS
- --------------------- -------------- ------------------------------------------------
<S> <C> <C>
John W. Burrows(2) May 4, 1990 President, Advantage Energy Services Ltd.
Canmore, Alberta (consulting corporation).
John E. Feick(1)(3) April 21, 1994 President and director of 3-D Reclamation Inc.,
Calgary, Alberta Calgary (environmental services corporation)
since October 1995. Prior thereto, Senior
Vice-President, NOVA Corporation of Alberta and
President and Chief Operating Officer, Novacor
Chemicals Ltd. (gas marketing, pipeline and
petrochemical corporation).
John A. Hagg April 28, 1982 President and Chief Executive Officer of the
Calgary, Alberta Corporation.
Michael M. Kanovsky(1)(3) April 28, 1982 President of Sky Energy Corporation (investment
Calgary, Alberta corporation) since July 1994. Prior thereto,
Chairman of PowerLink Corporation (cogeneration
development corporation) since July 1992.
W. Andrew Krusen, Jr.(2) June 3, 1997 Chairman of Dominion Energy and Minerals, Inc.
Tampa, Florida (oil and gas corporation).
</TABLE>
L-131
<PAGE> 338
<TABLE>
<CAPTION>
DIRECTORS
NAME AND MUNICIPALITY PRESENT PRINCIPAL OCCUPATION AND
OF RESIDENCE DIRECTOR SINCE PRINCIPAL OCCUPATIONS DURING THE LAST FIVE YEARS
- --------------------- -------------- ------------------------------------------------
<S> <C> <C>
Laurie S. MacLachlan(3) June 3, 1997 President of Angus Glen Golf Club Ltd. (golf
Markham, Ontario course management corporation) and Vice
President of Angus Glen Farm Ltd. (private
farming and horse breeding corporation).
Norman W. Robertson(1) January 1, 1995 Chairman, Prudential Steel Ltd. (manufacturing
Calgary, Alberta corporation) since August 1995. Prior thereto,
President and CEO of Atco Enterprises Inc.
(manufacturing, leasing and real estate
development corporation).
Donald R. Seaman(2) May 30, 1988 President, DRS Resource Investments Inc.
Calgary, Alberta (investment corporation).
A. Gordon Stollery(1) April 11, 1997 Chairman of the Corporation since April 1997.
Calgary, Alberta Prior thereto, Chairman, President and Chief
Executive Officer of Morrison Petroleums.
</TABLE>
<TABLE>
<CAPTION>
OFFICERS
NAME AND MUNICIPALITY PRESENT PRINCIPAL OCCUPATION AND
OF RESIDENCE OFFICE HELD PRINCIPAL OCCUPATIONS DURING THE LAST FIVE YEARS
- --------------------- ----------- ------------------------------------------------
<S> <C> <C>
Nick H. Antonenko Vice President, Officer of the Corporation since August 1993.
Calgary, Alberta Production Prior thereto, Operations Manager of the
Operations Corporation.
Greg N. Baum Vice President, Officer of the Corporation since March 1997.
Calgary, Alberta Exploitation Prior thereto, Vice President, Operations and
Engineering of Morrison Petroleums since
November 1994; prior thereto, Vice President,
Acquisitions of Morrison Petroleums since
January 1993.
Murray T. Brown General Counsel Officer of the Corporation since September,
Calgary, Alberta and Corporate 1997. Prior thereto, associate at Stikeman
Secretary Elliott (barristers and solicitors) and Howard
Mackie (barristers and solicitors).
Harry D. Cupric Treasurer Officer of the Corporation since March 1997.
Calgary, Alberta Prior thereto, Treasurer of Morrison Petroleums
since January 1993.
Donald A. Garner Executive Vice Officer of the Corporation since January 1998.
Calgary, Alberta President and Prior thereto, Manager, Oil Sands business unit
Chief Operating with Imperial Oil Limited (oil and gas
Officer corporation).
John A. Hagg President and Officer of the Corporation since April 1982.
Calgary, Alberta Chief Executive
Officer
John Richels Executive Vice Officer of the Corporation since April 1996.
Calgary, Alberta President and Prior thereto, Managing Partner, Calgary and
Chief Financial Chief Operating Partner, Bennett Jones Verchere
Officer (barristers and solicitors).
</TABLE>
L-132
<PAGE> 339
<TABLE>
<CAPTION>
OFFICERS
NAME AND MUNICIPALITY PRESENT PRINCIPAL OCCUPATION AND
OF RESIDENCE OFFICE HELD PRINCIPAL OCCUPATIONS DURING THE LAST FIVE YEARS
- --------------------- ----------- ------------------------------------------------
<S> <C> <C>
Jerry L. Rochon Vice President, Officer of the Corporation since March 1997.
Calgary, Alberta Land Prior thereto, Vice President, Land of Morrison
Petroleums since February 1994; prior thereto,
Land Manager, Morrison Petroleums since October
1992.
R. Alan Steele Controller Officer of the Corporation since December 1993.
Calgary, Alberta Prior thereto, Accounting Supervisor, Enron Oil
Canada Ltd.
Michael Sullivan Vice President, Officer of the Corporation since March 1997.
Calgary, Alberta Morrison Prior thereto, Vice President, Morrison
Facilities Petroleums since December 1996; prior thereto, a
Income Fund member of the management team of TransCanada
Pipelines (a pipeline corporation).
</TABLE>
- ---------------
Notes:
(1) Member of the Audit Committee. The Corporation is required to have an audit
committee, composed of members of the board of directors, under applicable
corporate legislation. The Corporation does not have an executive committee.
(2) Member of the Human Resources and Compensation Committee.
(3) Member of Governance and Nominating Committee.
All directors stand for election at each annual meeting of the shareholders
of the Corporation, the most recent of which was held on April 30, 1998. All
directors will hold office until the next annual meeting of shareholders, unless
their offices are vacated earlier, in accordance with the by-laws of the
Corporation.
As at December 31, 1997, the senior officers and directors of the
Corporation who held office at that time beneficially owned, in aggregate,
2,904,591 common shares, representing approximately 4.3% of the outstanding
common shares. The senior officers and directors also held, in aggregate,
2,611,310 stock options (of which 1,169,060 were vested) as at December 31,
1997.
INDUSTRY CONDITIONS
MARKETING
Natural Gas
Natural gas pricing is highly volatile and influenced by North American
market demand, regional supply, available transportation and storage capacity.
To provide stability, the Corporation has developed its market portfolio to
include a range of customers, supply terms, delivery locations and pricing.
The Corporation manages the commodity prices in its portfolio by
continuously adding contracts with fixed and market sensitive pricing
mechanisms. As of December 31, 1997, the Corporation marketed 20% of its natural
gas to industrial consumers, 15% to cogeneration facilities, 4% to local
distribution companies and 61% to marketing companies. In addition to marketing
its own supply, the Corporation provides fuel management services to several
buyers and sellers. Currently, the Corporation has 13.9 bcf of third party gas
supply under long term contract that it sells under netback arrangements.
The Corporation has 35% of its natural gas production dedicated to
contracts with terms longer than five years. The most significant of the
Corporation's long-term gas contracts is a prepaid gas supply contract with
Indeck-Yerkes Limited Partnership ("Indeck"), pursuant to which Northstar has
agreed to sell 26 bcf of natural gas to Indeck for use in Indeck's cogeneration
facility over approximately 12 years, commencing in November 1990. As of
December 31, 1997, the Corporation had a remaining obligation to deliver 11.0
bcf of natural gas. Under the terms of the contract, a prepayment of $15.6
million was made in 1989 by Indeck to Northstar. In addition to the prepayment,
additional payments are made by Indeck on a per unit basis for gas
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<PAGE> 340
delivered. The remaining balance of outstanding prepaid revenue is secured by a
fixed charge on certain of the Corporation's producing natural gas reserves.
Oil and Natural Gas Liquids
Oil is a global commodity and is subject to international market
volatility. To manage the volatility, the Corporation regularly negotiates sales
contracts with various refineries and marketing companies to ensure current
market pricing and to minimize transportation and quality differentials. When
deemed appropriate, the Corporation will use financial instruments to manage
price risk.
COMPETITIVE CONDITIONS
A discussion of the competitive conditions in the oil and gas industry and
the competitive factors affecting the business of the Corporation is found in
"Management's Discussion and Analysis" under the heading "Business Environment
and Risks" which is found on pages 30 and 31 of the Annual Report and is
incorporated herein by reference and forms a part of this Revised Annual
Information Form.
There is risk associated with marketing crude oil and natural gas. Price
uncertainty exists due to unpredictable variables such as weather, foreign
exchange rate fluctuations and economic disturbances, both domestically and
internationally. In the North American and global markets, the Corporation
cannot influence price and accordingly, in most circumstances, the Corporation
is a price-taker.
ROYALTIES AND INCENTIVES
In addition to federal regulations, each province has legislation and
regulations which govern land tenure, royalties, production rates, environmental
protection and other matters. The royalty regime is a significant factor in the
profitability of oil and natural gas production. Royalties payable on production
from lands other than Crown lands are determined by negotiations between the
mineral owner and the lessee. Crown royalties are determined by government
regulation and are calculated as a percentage of the value of the gross
production. The rate of royalties payable depends, in part, on prescribed
reference prices, well productivity, geographical location, field discovery date
and the type or quality of the petroleum product produced.
In Alberta, the royalty reserved to the Crown is subject to various
incentives, and varies between 15% and 30% in the case of new gas and between
15% and 35% in the case of old gas, depending upon the posted reference price
each month. Royalties on propane and butane are constant at 30%. The royalty on
pentane is based on a reference price which, in the case of new production,
varies from 22% to 35% and, in the case of old production, varies from 22% to
50%. The pentane rate fluctuates slightly from year to year depending on the
degree of change in the reference price. Alberta Crown royalties on oil
production are calculated on a sliding scale basis.
In Alberta, natural gas produced from qualifying intervals in eligible gas
wells spudded or deepened to a depth below 2,500 metres is subject to a royalty
exemption, with the amount of the exemption varying with depth of the well. Oil
produced from qualifying new formations is eligible for a third tier oil royalty
credit. In addition, there is an incentive for horizontal oil well re-entries.
In Alberta, a producer of oil and natural gas is entitled to a credit
against the royalties payable to the Crown by virtue of the ARTC program. The
ARTC rate is based on a price-sensitive formula, and the ARTC rate currently
varies between 75% (at prices for oil below $16/bbl) and 25% (at prices above
$33.40/bbl). The ARTC rate is applicable to a maximum of $2.0 million of Alberta
Crown royalties payable for each producer or associated group of producers.
Crown royalties on production from producing properties acquired from
corporations claiming maximum entitlement to ARTC will generally not be eligible
for ARTC. The ARTC rate is established quarterly based on the average "par
price", as determined by Alberta Energy for the previous quarterly period. On
December 22, 1997 the Government of Alberta gave notice that it intended to
review the ARTC program with expected changes to come into effect before 2001.
In British Columbia, the royalty reserved to the Crown in respect of oil
depends on the vintage of the oil (whether it was produced from a pool
discovered before or after October 31, 1975), the quantity of oil
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<PAGE> 341
produced in a month and the value of the oil. Oil produced from newly discovered
pools may be exempt from the payment of a royalty for the first 36 months of
production. The royalty payable on natural gas is determined by a sliding scale
based on a reference price which is the greater of the amount obtained by the
producer and at prescribed minimum price. Gas produced in association with oil
has a minimum royalty of 8% while the royalty in respect of other gas may not be
less than 15%.
The Corporation has some oil and gas production from wells located on
Indian reserve lands. Indian Royalty rates depend on well productivity. Rates
vary from 15% to 35%. Gas Cost Allowance deductions cannot exceed 50% of the
gross royalty payable.
INDUSTRY REGULATION
Government Regulation
The oil and natural gas industry is subject to extensive controls and
regulations imposed by various levels of government. It is not expected that any
of these controls or regulations will affect the operations of the Corporation
in a manner materially different than they would affect other oil and gas
companies of similar size. All current legislation is a matter of public record
and the Corporation is unable to predict what additional legislation or
amendments may be enacted.
Environmental Regulation
The oil and natural gas industry is currently subject to environmental
regulation pursuant to provincial and federal legislation. Environmental
legislation provides for restrictions and prohibitions on releases or emissions
of various substances produced or utilized in association with certain oil and
gas industry operations. In addition, legislation requires that well and
facility sites be abandoned and reclaimed to the satisfaction of provincial
authorities. A breach of such legislation may result in the imposition of fines
and penalties.
In Alberta, environmental compliance has been governed by the Alberta
Environmental Protection and Enhancement Act ("AEPEA") since September 1, 1993.
In addition to replacing a variety of older statutes which related to
environmental matters, the AEPEA also imposes certain new environmental
responsibilities on oil and natural gas operators in Alberta and in certain
instances also imposes greater penalties for violations.
British Columbia's Environmental Assessment Act became effective June 30,
1995. This legislation consolidates the previous processes for the review of
major energy projects into a single environmental assessment process which
contemplates public participation in the environmental review.
The Corporation is committed to meeting its responsibilities to protect the
environment wherever it operates and anticipates making increased, although not
material, expenditures of both a capital and operating nature as a result of the
increasingly stringent laws relating to the protection of the environment. The
Corporation believes that it is in material compliance with applicable
environmental laws and regulations.
Export/Removal Regulation
The government of Alberta regulates the removal of gas from the province
through a removal permit process. Removal permits are available for terms of two
years, or with sufficient gas reserves, for longer durations. The National
Energy Board regulates the export of oil and natural gas from Canada. Upon
receipt of an export order, a party may export natural gas and light oil for a
period of two years and heavy oil for a period of one year. Exports of longer
duration (to a maximum of twenty-five years) may be allowed, subject to the
demonstration of a sufficient reserve base, the holding of a public hearing
before the NEB and the approval of Governor-in-Council.
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<PAGE> 342
ADDITIONAL INFORMATION
Additional information, including directors' and officers' remuneration and
indebtedness, principal holders of the Corporation's common shares, options to
purchase common shares and interests of insiders in material transactions, where
applicable, is set forth in the management proxy circular of the Corporation
dated March 27, 1998, relating to the annual meeting of shareholders held on
April 30, 1998. Additional financial information is set forth in the financial
statements of the Corporation, which are included in the Corporation's Annual
Report.
The Corporation will provide to any person, upon request to the Corporate
Secretary of the Corporation:
(a) when securities of the Corporation are in the course of a
distribution pursuant to a short form prospectus or a preliminary short
form prospectus has been filed in respect of a distribution of its
securities:
(i) one copy of this Revised Annual Information Form, together with
one copy of any document, or the pertinent pages of any document,
incorporated by reference in this Revised Annual Information Form;
(ii) one copy of the comparative financial statements of the
Corporation for its most recently completed financial year, together
with the accompanying report of the auditor and one copy of any interim
financial statements of the Corporation subsequent to the financial
statements for its most recently completed financial year;
(iii) one copy of the management proxy circular of the Corporation
in respect of its most recent annual meeting of shareholders that
involved the election of directors; and
(iv) one copy of any other document incorporated by reference into
the preliminary short form prospectus or the short form prospectus; or
(b) at any other time, one copy of any documents referred to in
paragraphs (a)(i), (ii) and (iii) above, provided the Corporation may
require the payment of a reasonable charge if the request is made by a
person who is not a security holder of the Corporation.
For additional copies of this Revised Annual Information Form and the
materials listed above, please contact Murray T. Brown, General Counsel and
Corporate Secretary at (403) 213-8000.
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<PAGE> 343
NORTHSTAR ENERGY LOGO
NORTHSTAR ENERGY CORPORATION
ANNUAL MEETING OF SHAREHOLDERS
TO BE HELD ON APRIL 30, 1998
MANAGEMENT PROXY CIRCULAR
SOLICITATION OF PROXIES
THIS MANAGEMENT PROXY CIRCULAR (THE "INFORMATION CIRCULAR") IS FURNISHED IN
CONNECTION WITH THE SOLICITATION BY THE MANAGEMENT OF NORTHSTAR ENERGY
CORPORATION (THE "CORPORATION") OF PROXIES TO BE USED AT THE ANNUAL MEETING (THE
"MEETING") OF THE SHAREHOLDERS (THE "SHAREHOLDERS") OF THE CORPORATION, WHICH IS
TO BE HELD AT THE TIME AND PLACE AND FOR THE PURPOSES SET FORTH IN THE
ACCOMPANYING NOTICE OF MEETING AND IN THIS INFORMATION CIRCULAR. Solicitation of
proxies will be primarily by mail, but may also be undertaken by way of
telephone, facsimile or oral communication by the directors, officers and
regular employees of the Corporation, at no additional compensation. Costs
associated with the solicitation of proxies will be borne by the Corporation.
APPOINTMENT OF PROXYHOLDERS AND REVOCATION OF PROXIES
John A. Hagg and John Richels (the management designees named in the
accompanying Instrument of Proxy) are both officers of the Corporation. John A.
Hagg is also a director of the Corporation. A SHAREHOLDER HAS THE RIGHT TO
APPOINT A PERSON (WHO NEED NOT BE A SHAREHOLDER) OTHER THAN JOHN A. HAGG OR JOHN
RICHELS, TO REPRESENT THE SHAREHOLDER AT THE MEETING. To exercise this right, a
Shareholder should insert the name of the other person in the blank space
provided on the Instrument of Proxy or complete another appropriate form of
proxy. AN INSTRUMENT OF PROXY WILL NOT BE VALID UNLESS IT IS DEPOSITED AT THE
OFFICES OF CIBC MELLON TRUST COMPANY, 600, 333 -- 7TH AVENUE, S.W., CALGARY,
ALBERTA, T2P 2Z1, NOT LESS THAN FORTY-EIGHT (48) HOURS (EXCLUDING SATURDAYS,
SUNDAYS AND HOLIDAYS) BEFORE THE TIME OF THE MEETING OR ANY ADJOURNMENT THEREOF.
A registered Shareholder who has submitted an Instrument of Proxy may
revoke it by an instrument in writing signed by the Shareholder or by an
authorized attorney or, if the Shareholder is a corporation, by a duly
authorized officer. To be effective, such instrument must be deposited either:
(i) at the offices of CIBC Mellon Trust Company, 600, 333 -- 7th Avenue S.W.,
Calgary, Alberta, T2P 2Z1, at any time up to and including the last business day
preceding the day of the Meeting, or any adjournment thereof; or (ii) with the
Chairman of the Meeting on the day of the Meeting, or any adjournment thereof.
In addition, an Instrument of Proxy may be revoked: (i) by the Shareholder
personally attending the Meeting and voting the securities represented thereby
or, if the Shareholder is a corporation, by a representative of that corporation
attending the Meeting and voting such securities; or (ii) in any other manner
permitted by law.
EXERCISE OF DISCRETION BY PROXYHOLDERS
The management designees named in the accompanying Instrument of Proxy
will, on any ballot that may be called for at the Meeting, vote or withhold from
voting the shares in respect of which they are appointed in accordance with the
direction of the Shareholder appointing them. IN THE ABSENCE OF SUCH DIRECTION,
THE SHARES WILL BE VOTED FOR: (I) THE ELECTION OF DIRECTORS; AND (II) THE
APPOINTMENT OF AUDITORS, AT SUCH REMUNERATION AS MAY BE DETERMINED BY THE BOARD
OF DIRECTORS OF THE CORPORATION, ALL AS MORE PARTICULARLY DESCRIBED IN THIS
INFORMATION CIRCULAR. The accompanying Instrument of Proxy confers discretionary
authority upon the persons named therein with respect to amendments of or
variations to the matters identified in the Notice of Meeting and with respect
to other matters that may properly be brought before the Meeting. As at the date
hereof, management of the Corporation knows of no such amendments, variations or
other matters to be brought before the Meeting.
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<PAGE> 344
SIGNING OF PROXY
The Instrument of Proxy must be signed by the Shareholder or the
Shareholder's duly appointed attorney authorized in writing or, if the
Shareholder is a corporation, by a duly authorized officer. An Instrument of
Proxy signed by a person acting as attorney or in some other representative
capacity (including a representative of a corporate Shareholder) should indicate
that person's capacity (following his signature) and should be accompanied by
the appropriate instrument evidencing qualification and authority to act (unless
such instrument has previously been filed with the Corporation).
VOTING SHARES AND PRINCIPAL HOLDERS OF COMMON SHARES
VOTING OF COMMON SHARES -- GENERAL
As at February 28, 1998, there were 68,050,872 common shares of the
Corporation issued and outstanding, each carrying the right to one vote per
share.
Only persons registered as holders of common shares on the books of the
Corporation as at the close of business on Thursday, March 26, 1998 (the "Record
Date") are entitled to receive notice of and to vote at the Meeting, except that
any person who acquires common shares of the Corporation from a Shareholder
after the Record Date may vote the shares so acquired if, not later than 10 days
prior to the Meeting, that person makes a request to CIBC Mellon Trust Company
to have his name included on the Shareholders' list for the Meeting and
establishes that he owns the common shares.
VOTING OF COMMON SHARES -- ADVICE TO BENEFICIAL HOLDERS OF COMMON SHARES
THE INFORMATION SET FORTH IN THIS SECTION IS OF SIGNIFICANT IMPORTANCE TO
MANY SHAREHOLDERS, AS A SUBSTANTIAL NUMBER OF SHAREHOLDERS DO NOT HOLD COMMON
SHARES IN THEIR OWN NAMES. Shareholders who do not hold their shares in their
own names (referred to in this Information Circular as "Beneficial
Shareholders") should note that only proxies deposited by Shareholders whose
names appear on the records of the Corporation as the registered holders of
common shares can be recognized and acted upon at the Meeting. If shares are
listed in an account statement provided to a Shareholder by a broker, then in
almost all cases, those shares will not be registered in the Shareholder's name
on the books of the Corporation. Such shares will more likely be registered
under the name of the Shareholder's broker or an agent of that broker. In
Canada, the vast majority of such shares are registered under the name of CDS &
Co. (the registration name for The Canadian Depositary for Securities, which
acts as nominee for many Canadian brokerage firms). Shares held by brokers or
their agents or nominees can only be voted (for or against resolutions) upon the
instructions of the Beneficial Shareholder. Without specific instructions,
brokers and their agents and nominees are prohibited from voting shares for the
broker's clients. THEREFORE, BENEFICIAL SHAREHOLDERS SHOULD ENSURE THAT
INSTRUCTIONS RESPECTING THE VOTING OF THEIR COMMON SHARES ARE COMMUNICATED TO
THE APPROPRIATE PERSON.
Although a Beneficial Shareholder may not be recognized directly at the
Meeting for the purposes of voting common shares registered in the name of his
broker (or an agent of the broker), a Beneficial Shareholder may attend at the
Meeting as proxyholder for the registered Shareholder and vote the common shares
in that capacity. Beneficial Shareholders who wish to attend the Meeting and
indirectly vote their common shares as proxyholders for the registered
Shareholders should enter their own names in the blank space on the Instrument
of Proxy provided to them and return the same to their broker (or the broker's
agent) in accordance with the instructions provided by such broker (or agent),
well in advance of the Meeting.
PRINCIPAL HOLDERS OF COMMON SHARES
To the knowledge of the directors and senior officers of the Corporation,
as at the date hereof, no person or corporation beneficially owns, or exercises
control or direction over, more than 10% of the outstanding common shares of the
Corporation.
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ELECTION OF DIRECTORS
The Articles of the Corporation provide that the Corporation will have not
less than three and not more than fifteen directors. At the Meeting, it is
proposed that nine directors be elected to hold office until the next annual
meeting of the Shareholders or until their successors are elected or appointed.
UNLESS OTHERWISE DIRECTED, THE MANAGEMENT DESIGNEES NAMED IN THE ACCOMPANYING
INSTRUMENT OF PROXY INTEND TO VOTE IN FAVOUR OF THE ELECTION, AS DIRECTORS, OF
THE NOMINEES WHOSE NAMES ARE SET FORTH BELOW. The Corporation is required by
applicable corporate legislation to have an audit committee comprised of members
of the board of directors. In addition, the directors have established
committees of the board to deal with human resources and compensation
recommendations and corporate governance and board composition matters. The
present members of the Audit Committee, the Human Resources and Compensation
Committee and the Governance and Nominating Committee of the board of directors
are identified below. The Corporation does not have an executive committee.
The following table sets forth the names and municipalities of residence of
the persons proposed to be nominated for election as directors, all other
positions and offices within the Corporation now held by them, their principal
occupations or employments, the periods during which they have served as
directors of the Corporation and the number of common shares of the Corporation
beneficially owned, directly or indirectly, or over which control or direction
is exercised, by each of them, as at February 28, 1998.
<TABLE>
<CAPTION>
COMMON SHARES
NAME AND MUNICIPALITY PRINCIPAL OCCUPATION OR BECAME A BENEFICIALLY
OF RESIDENCE OFFICE(S) CURRENTLY HELD EMPLOYMENT DIRECTOR OWNED(1)
- --------------------- ------------------------ ----------------------- -------- -------------
<S> <C> <C> <C> <C>
John W. Burrows(3) Director President, Advantage Energy May 4, 1990 2,951
Canmore, Alberta Services Ltd., a private
consulting corporation.
John E. Feick(2)(4) Director President, 3-D Reclamation April 21, 1994 2,043
Calgary, Alberta Inc., a private
environmental services
corporation.
John A. Hagg President, Chief Executive President and Chief April 28, 1982 294,186
Calgary, Alberta Officer and Director Executive Officer of the
Corporation.
Michael M. Kanovsky(2)(4) Director President, Sky Energy April 28, 1982 78,010
Calgary, Alberta Corporation, a private
investment corporation.
W. Andrew Krusen, Jr.(3) Director Chairman, Dominion Energy June 3, 1997 26,571
Tampa, Florida and Minerals, an oil and gas
corporation.
Laurie S. MacLachlan(4)(5) Director President, Angus Glen Golf June 3, 1997 1,052,153
Markham, Ontario Club Ltd., a golf course
management corporation and
Vice-President, Angus Glen
Farm Ltd., a private farming
and horse breeding
corporation.
Norman W. Robertson(2) Director Chairman, Prudential Steel January 1, 1995 5,222
Calgary, Alberta Ltd., a public manufacturing
corporation.
Donald R. Seaman(3) Director President, DRS Resource May 30, 1998 8,951
Calgary, Alberta Investments Inc., a private
investment corporation.
A. Gordon Stollery(2)(5) Chairman and Director Chairman of the Corporation. April 11, 1997 1,380,380
Calgary, Alberta
</TABLE>
- ---------------
NOTES:
(1) The information as to shares beneficially owned, not being within the
knowledge of the Corporation, has been furnished by the respective nominees
individually.
(2) Member of the Audit Committee of the board of directors.
(3) Member of the Human Resources and Compensation Committee of the board of
directors.
(4) Member of the Governance and Nominating Committee of the board of directors.
(5) Laurie S. MacLachlan and A. Gordon Stollery are associates for the purposes
of applicable securities legislation. A. Gordon Stollery has the right to
acquire and the right to exercise control and direction over 887,872 common
shares beneficially owned by Laurie S. MacLachlan, which rights expire April
1, 1998.
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<PAGE> 346
EXECUTIVE COMPENSATION
SUMMARY COMPENSATION TABLE
The following table sets forth information concerning the total
compensation paid, during each of the last three financial years (as
applicable), to the Corporation's Chief Executive Officer and each of the
Corporation's four other executive officers who received the highest
remuneration (determined with regard to base salary and bonuses) during the
financial year ended December 31, 1997 (collectively the "Named Executive
Officers").
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
ANNUAL COMPENSATION -------------
------------------------------- SECURITIES
OTHER ANNUAL UNDER OPTIONS ALL OTHER
SALARY BONUS COMPENSATION GRANTED COMPENSATION(2)
NAME AND PRINCIPAL POSITION YEAR ($) ($) ($)(1) (#) ($)
- --------------------------- ---- ------- ------ ------------ ------------- ---------------
<S> <C> <C> <C> <C> <C> <C>
John A. Hagg 1997 262,500 30,000 -- 200,000 30,250
President and Chief Executive 1996.. 235,000 -- -- 80,000 26,425
Officer 1995 218,333 -- -- 125,000 25,417
Jeffrey T. Smith(5) 1997 222,500 30,000 -- 50,000 26,850
Chief Operating Officer 1996 175,000 -- -- 50,000 23,125
1995 147,667 -- -- 65,000 21,883
John Richels(3) 1997 222,500 30,000 7,951(4) 150,000 26,850
Executive Vice President and 1996 131,250 -- 6,825(4) 286,500 20,344
Chief Financial Officer
Jerry L. Rochon 1997(7) 152,772 30,000 -- 110,000 121,762(6)
Vice President, Land 1996(7) 108,000 31,000 -- 70,000(8) --
1995(7) 105,000 -- -- -- --
Nick H. Antonenko 1997 157,500 30,000 -- 85,000 22,950
Vice President, Production 1996 130,000 -- -- 25,000 20,150
Operations 1995 114,583 -- -- 31,000 17,187
</TABLE>
- ---------------
NOTES:
(1) Perquisites and other personal benefits received in 1995, 1996 and 1997 did
not exceed the lesser of $50,000 and 10% of the total annual salary and
bonus for any of the Named Executive Officers.
(2) Except as otherwise noted, the amounts consist of contributions made by the
Corporation on behalf of each Named Executive Officer to the Corporation's
savings plan (see "Savings Plan") and pension plan contributions made by the
Corporation on behalf of each Named Executive Officer (see "Pension Plan and
Supplemental Benefits").
(3) Mr. Richels commenced his employment with the Corporation in April 1996.
(4) Represents imputed interest on a loan made to Mr. Richels. See "Indebtedness
of Directors and Senior Officers".
(5) Mr. Smith retired from his position as Chief Operating Officer effective
December 31, 1997. Donald A. Garner was hired as the Corporation's new
Executive Vice President, Chief Operating Officer effective January 1, 1998.
(6) Of this amount, $100,000 represents a payment made to Mr. Rochon in
connection with the business combination between Northstar and Morrison
Petroleums Ltd. ("Morrison Petroleums").
(7) Mr. Rochon's compensation for the financial years ended December 31, 1995
and 1996 and during the period from January 1, 1997 to March 14, 1997 was
paid by Morrison Petroleums, his employer during those periods. Compensation
for the period following March 14, 1997, was provided by the Corporation.
(8) Represents the number of common shares of the Corporation issuable upon the
exercise of options, which previously entitled the holder to acquire shares
of Morrison Petroleums. see "Morrison Petroleums Options".
STOCK OPTION PLAN
On May 27, 1987, the shareholders of the Corporation approved a stock
option plan under which incentive options could be granted to the officers,
employees and directors of the Corporation and consultants retained by the
Corporation. On December 11, 1995, the stock option plan was revised to comply
with the new policy of The Toronto Stock Exchange (the "TSE") relating to share
incentive arrangements. At the
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Corporation's 1997 annual and special meeting, the shareholders ratified and
confirmed a further amendment to the stock option plan, which increased the
number of common shares reserved for issuance upon the exercise of options
thereunder to 6,760,134 common shares.
As at February 28, 1998, options to acquire an aggregate of 4,972,850
common shares were outstanding under the stock option plan and a total of
987,290 common shares were available for additional options that might be
granted under the option plan. Pursuant to the stock option plan, as revised,
officers, key employees and directors of the Corporation and consultants
retained by the Corporation may be granted options to acquire common shares. The
stock option plan is administered by the board of directors, which establishes
the exercise price and the term of the options at the time options are granted.
The term of any option may not exceed ten years from the date the option is
granted. Options are granted on such terms with respect to vesting as the board
of directors may determine at the time the options are granted.
Options granted under the stock option plan are non-assignable and are
subject to early termination in the event of the death or disability of an
optionee or in the event the optionee ceases to be associated with the
Corporation for other reasons, including termination of employment.
MORRISON PETROLEUMS OPTIONS
During negotiations respecting the business combination between the
Corporation and Morrison Petroleums in February 1997, both parties agreed to
make suitable arrangements to deal with the then outstanding options to acquire
shares of Morrison Petroleums. The outstanding Morrison Petroleums options were
subject to typical acceleration features, which provided that unvested options
would become immediately exercisable upon completion of the Corporation's
take-over bid. Although the Corporation agreed, in connection with the take-over
bid, to purchase any shares issued upon the exercise of Morrison Petroleums
options that vested as a result of the acceleration feature, a second
alternative was made available to option holders under which such persons could
convert their options, so as to permit the acquisition of an adjusted number of
common shares of the Corporation (rather than shares of Morrison Petroleums)
upon exercise. The majority of the outstanding Morrison Petroleums options were
converted in this manner. As at February 28, 1998, there were 1,529,234 common
shares issuable upon the exercise of the converted options. The converted
options are not governed by the Corporation's stock option plan and the common
shares issuable upon the exercise of those options are not included in and do
not affect the number of shares reserved under the stock option plan. One third
of the converted options will expire on each of April 1, 1998, 1999 and 2000.
OPTION GRANTS DURING THE YEAR ENDED DECEMBER 31, 1997
The following table sets forth certain information concerning stock options
granted to the Named Executive Officers during the financial year ended December
31, 1997. The Corporation has not granted any stock appreciation rights.
<TABLE>
<CAPTION>
MARKET VALUE OF
SECURITIES
% OF TOTAL UNDERLYING
SECURITIES OPTIONS GRANTED OPTIONS AT THE
UNDER OPTIONS TO EMPLOYEES IN EXERCISE PRICE TIME OF GRANT EXPIRATION
NAME GRANTED(#)(1) 1997 ($/SECURITY) ($/SECURITY) DATE
- ---- ------------- --------------- -------------- --------------- ----------
<S> <C> <C> <C> <C> <C>
John A. Hagg 80,000 6.5% 13.25 13.25 staggered(2)
120,000 9.10 9.10 staggered(4)
Jeffrey T. Smith 50,000 1.6% 13.25 13.25 staggered(2)
John Richels 50,000 4.9% 13.25 13.25 staggered(2)
100,000 9.10 9.10 staggered(4)
Jerry Rochon 50,000 3.6% 13.25 13.25 staggered(3)
60,000 9.10 9.10 staggered(4)
Nick H. Antonenko 25,000 2.8% 13.25 13.25 staggered(2)
60,000 9.10 9.10 staggered(4)
</TABLE>
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<PAGE> 348
- ---------------
Notes:
(1) The securities consist of common shares in the capital of the Corporation.
(2) The options vest and become exercisable in 2000 and expire in 2002.
(3) The options vest and become exercisable at various times between April 11,
1999 and July 1, 2000 and expire at various times between April 11, 2001 and
July 1, 2002.
(4) The options vest and become exercisable at various times between January 1,
1999 and January 1, 2001 and expire at various times between January 1, 2001
and January 1, 2003.
AGGREGATED OPTION EXERCISES DURING THE YEAR ENDED DECEMBER 31, 1997 AND
FINANCIAL YEAR-END OPTION VALUES
The following table sets forth certain information respecting options
exercised by Named Executive Officers during the financial year ended December
31, 1997. The numbers and accrued value of unexercised stock options held by
Named Executive Officers as at December 31, 1997 are also set forth in the
following table.
<TABLE>
<CAPTION>
VALUE OF UNEXERCISED
UNEXERCISED OPTIONS AT IN-THE-MONEY OPTIONS
SECURITIES AGGREGATE DECEMBER 31, 1997 AT DECEMBER 31, 1997
ACQUIRED ON VALUE (#) ($)
EXERCISE REALIZED --------------------------- ---------------------------------
NAME (#) ($) EXERCISABLE UNEXERCISABLE EXERCISABLE(1) UNEXERCISABLE(1)
- ---- ----------- --------- ----------- ------------- -------------- ----------------
<S> <C> <C> <C> <C> <C> <C>
John A. Hagg -- -- 330,000 400,000 998,000 120,000
Jeffrey T. Smith 50,800 335,510 74,200 160,000 36,960 3,000
John Richels -- -- 119,500 286,500 8,725 95,000
Jerry Rochon 107,100 388,151 49,000 110,000 -- 57,000
Nick H. Antonenko -- -- 30,260 136,000 15,655 58,300
</TABLE>
- ---------------
Note:
(1) The value of the unexercised "in-the-money" options has been determined by
subtracting the exercise price of the options from the closing common share
price of $10.05 on December 31, 1997, as reported by the TSE, and
multiplying by the number of common shares that may be acquired upon the
exercise of the options.
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<PAGE> 349
PENSION PLAN AND SUPPLEMENTAL BENEFITS
The Corporation has established defined contribution plans for its
employees (including the Named Executive Officers), providing for the payment of
pensions to such employees. Under the pension plans, the Corporation contributes
6% of the base salary of each non-executive employee (subject to the maximum
amount permitted under the Income Tax Act (Canada)). In the case of executive
level employees, the Corporation contributes 10% of the base salary of each
employee (subject to the maximum amount permitted under the Income Tax Act
(Canada)).
Mr. Hagg is also a party to a supplemental benefits agreement under which
he will, upon his retirement as an employee of the Corporation or at age 60,
whichever is later, be entitled to an annual retirement benefit equal to 2% of
the average annual remuneration paid to Mr. Hagg by the Corporation in the three
years that he received the highest remuneration from the Corporation, multiplied
by the number of years of service credited to Mr. Hagg. For the purposes of the
supplemental benefits agreement, Mr. Hagg's annual remuneration consists of
annual base salary and any remuneration paid by the Corporation to Mr. Hagg
under any profit sharing or officer or employee incentive, compensation or bonus
program, excluding any amount paid to or contributions made on behalf of Mr.
Hagg pursuant to the Corporation's savings plan, which contributions are
included in the Summary Compensation Table above, under the column entitled "All
Other Compensation" (1997 -- $15,750; 1996 -- $12,925; 1995 -- $10,917). Amounts
payable to Mr. Hagg under the supplemental benefits agreement are not subject to
any deductions for social security or other offset amounts. As at December 31,
1997, Mr. Hagg had 12 years of credited service for the purposes of the
supplemental benefits agreement.
SAVINGS PLAN
The Corporation has established a savings plan for all employees of the
Corporation and for members of the board of directors. Under the savings plan,
the Corporation contributes an amount equal to 2% of the base salary of each
employee. Employees may elect to contribute a portion of their base salary (to a
maximum of 4% of their base salary) to the savings plan and a matching
contribution is made by the Corporation. In the case of the directors, the
matching contribution is limited to an amount not in excess of 50% of the annual
retainer payable to each individual director. Funds contributed to the savings
plan by the Corporation, employees and directors are deposited with a trustee
and, at the direction of the employee or director, are used to purchase common
shares of the Corporation in the market or to purchase mutual funds. As at
December 31, 1997, the trustee held 425,244 common shares of the Corporation on
behalf of the savings plan participants.
COMPOSITION OF THE HUMAN RESOURCES AND COMPENSATION COMMITTEE
The Human Resources and Compensation Committee reports to the board of
directors of the Corporation and was comprised of the following three directors
during the year ended December 31, 1997:
John W. Burrows, Chairman; W. Andrew Krusen, Jr.; Donald R. Seaman.
REPORT ON EXECUTIVE COMPENSATION
Compensation Philosophy and Process
The compensation paid to executive officers of the Corporation (including
the Named Executive Officers) is determined on the basis of several factors,
including competitive compensation within the oil and gas industry, individual
performance and overall corporate performance. Competitive compensation is
measured using benchmarks of peer group corporations and participation in
compensation surveys.
The Human Resources and Compensation Committee, with the full support of
the board of directors, believes that overall levels of compensation should be
tied to corporate performance. Base salaries and benefits for each of the
Corporation's executive officers, including the chief executive officer and the
other Named Executive Officers, are established at or under median levels for
similar positions in corporations of comparable size within the oil and gas
industry. Incentive-based compensation is provided in the form of stock
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<PAGE> 350
options. The annual allocation of stock options and the terms of those options
are designed to be an integral component of compensation. The terms of new
options granted annually under the Corporation's stock option plan are generally
subject to vesting provisions, providing significant monetary incentives from
in-the-money options that are not yet vested.
The Human Resources and Compensation Committee conducts an annual review to
consider and adjust executive compensation and to determine the stock option
grants to be recommended to the board of directors. In conducting its review,
the committee compares current compensation levels with published industry
surveys and, if necessary, engages specialists in human resources and
compensation to augment this comparative analysis. In addition, the chief
executive officer provides an individual performance review for each officer,
excluding himself. Through this process, individual salary levels are determined
and, if warranted by specific achievement, bonuses are awarded.
Compensation of the Chief Executive Officer
The process of assessing the performance of the chief executive officer and
the determination of his annual compensation is similar to the process
established for the other executive officers of the Corporation. In addition to
his individual performance, Mr. Hagg is assessed having regard to the
Corporation's overall performance in meeting specific objectives. In the opinion
of the committee, the base salary earned by Mr. Hagg during the period from 1995
through 1997 was below the median level for corporations of similar size within
the oil and gas industry. A significant portion of Mr. Hagg's compensation was
derived from incentive stock options.
During the year ended December 31, 1997, Mr. Hagg was granted options to
purchase up to 200,000 common shares. These stock options provide an incentive
directly related to growth in the value of the Corporation's common shares,
which is considered by the board of directors to be one of Mr. Hagg's principal
performance objectives.
John W. Burrows, Chairman
W. Andrew Krusen, Jr.
Donald R. Seaman
EMPLOYMENT CONTRACTS
The Corporation has entered into agreements with each of its Named
Executive Officers, which provide for certain payments to be made to a Named
Executive Officer if his employment is actually or constructively terminated by
the Corporation without cause. Payments under these agreements will consist of
base salary to the date of termination of employment plus a pro-rata share of
any bonus payable to the Named Executive Officer in the year of termination,
together with a lump sum payment. The lump sum payments contemplated by the
foregoing agreements vary between 18 and 24 months of salary, depending upon the
Named Executive Officer affected.
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<PAGE> 351
PERFORMANCE GRAPH
The following graph compares the cumulative return to Shareholders over the
five year period ended December 31, 1997, on an investment in the common shares
of the Corporation (assuming a $100 investment was made on December 31, 1992),
with the cumulative total return of the TSE Composite Index and the TSE Oil and
Gas Producers Sub-Index, assuming reinvestment of dividends.
CUMULATIVE VALUE OF A $100 INVESTMENT
<TABLE>
<CAPTION>
TSE OIL &
NORTHSTAR TSE 300 GAS
MEASUREMENT PERIOD ENERGY COMPOSITE PRODUCERS
(FISCAL YEAR COVERED) CORPORATION INDEX SUB-INDEX
<S> <C> <C> <C>
1992 100 100 100
1993 233 133 138
1994 215 132 126
1995 251 152 146
1996 286 195 200
1997 180 224 180
</TABLE>
DIRECTORS' COMPENSATION
Directors who are not also officers of the Corporation receive an annual
retainer of $8,500 and $800 for each meeting of the board or a committee
attended. In addition, those directors may elect to participate in the
Corporation's savings plan by making a contribution in an amount not in excess
of 50% of the annual retainer payable to each individual director, with a
matching contribution being made by the Corporation (see "Savings Plan"). During
the year ended December 31, 1997, the aggregate compensation paid or payable to
qualifying directors of the Corporation amounted to $152,037 (including savings
plan contributions). During the period from January 1, 1997 to the date of
completion of the business combination transaction between Northstar and
Morrison Petroleums, the directors of Morrison Petroleums were paid an aggregate
of $209,000, including $139,000 paid to directors of Morrison Petroleums who
became directors of Northstar following completion of the business combination.
In April 1997, an aggregate of 120,000 options were granted to the 10
outside directors of the Corporation, at an exercise price of $13.25 per common
share and in December 1997 an aggregate of 90,000 options were granted to the 10
outside directors of the Corporation, at an exercise price of $9.10. The
exercise price of those options was based on the market price of the common
shares of the Corporation, at the time of grant.
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<PAGE> 352
INDEBTEDNESS OF DIRECTORS AND SENIOR OFFICERS
No director, senior officer or person nominated for election as a director
of the Corporation (or any associate or affiliate of any such person) has been
indebted to the Corporation (or any subsidiary of the Corporation) at any time
since the beginning of the last financial year of the Corporation, with the
exception of John Richels. Upon becoming a full-time employee of Northstar in
1996, the Corporation loaned to Mr. Richels the sum of $250,000 to assist Mr.
Richels in making the transition from private legal practice to industry. The
loan is non-interest bearing and unsecured and matures on December 31, 2000. As
at December 31, 1997, the amount outstanding under the foregoing loan was
$212,000.
CORPORATE GOVERNANCE PRACTICES
In February, 1995, the TSE adopted the report of its Committee on Corporate
Governance in Canada and issued guidelines for effective corporate governance
(the "guidelines"). The guidelines address matters such as the constitution and
independence of corporate boards, the functions to be performed by boards and
their committees and the effectiveness and education of board members. These
guidelines adopted as a listing requirement the annual disclosure by each listed
corporation of its approach to corporate governance with reference to the
guidelines.
The board of directors and senior management of the Corporation consider
good corporate governance to be an integral part of the effective and efficient
operation of Canadian corporations. Disclosure respecting the Corporation's
approach to corporate governance is set forth below.
MANDATE OF THE BOARD OF DIRECTORS
The board of directors is generally responsible for managing the business
and affairs of the Corporation. The principal responsibility of the board is to
promote the best interests of the Corporation and its shareholders. This
responsibility includes the following: (i) approving fundamental operating,
financial and other corporate plans, strategies and objectives; (ii) evaluating
the performance of the Corporation and senior management; (iii) selecting,
regularly evaluating and fixing the compensation of executive officers; (iv)
adopting policies of corporate governance and conduct, including compliance with
stock exchange policies, applicable laws and regulations and with financial and
other controls; (v) reviewing the process of providing appropriate financial and
operational information to shareholders and the public generally; and (vi)
evaluating the overall effectiveness of the board of directors. The board has
explicitly acknowledged its responsibility for the stewardship of the
Corporation. The board advises management in matters of strategic planning,
business risk identification, succession planning, communications policy and the
integrity of internal control and management information systems. The board
fulfills its responsibilities through regular meetings. It meets a minimum of
once in each fiscal quarter. In addition, the board meets at such other times as
may be required if it is not possible to deal with the Corporation's business at
a regularly scheduled quarterly meeting.
COMPOSITION OF THE BOARD OF DIRECTORS
The composition and independence of corporate boards is an important
element of corporate governance. An "unrelated" director, under the guidelines,
is independent of management and is free from any interest and any business or
other relationship that could, or could reasonably be perceived to, materially
interfere with the director's ability to act in the best interests of the
corporation, other than interests arising from the director also being a
shareholder. In defining an unrelated director, the guidelines place an emphasis
on the ability of a director to exercise objective judgment, independent of
management. The guidelines also draw a distinction between inside and outside
directors. An inside director is a director who is an officer or employee of a
corporation or any of its affiliates and an outside director is any director who
is not an inside director.
Only one of the nine persons to be nominated for election to the board of
directors at the Meeting is a related director. As President and Chief Executive
Officer of the Corporation, Mr. Hagg is a member of management and is considered
to be both a related director and an inside director.
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<PAGE> 353
BOARD INDEPENDENCE
A. Gordon Stollery is the non-executive Chairman of the Corporation and is
not considered to be a member of management. In addition to his other duties as
Chairman, Mr. Stollery is responsible for ensuring the independence of the board
and individual directors. In this regard, Mr. Stollery is expected to consult
with the chief executive officer and, when applicable, other directors on
matters relating to board independence, including the selection of committee
members and committee chairmen, meeting agendas, the format and adequacy of
information provided to the board and the effectiveness of board meetings and
processes.
The Corporation allows any member of the board to engage an outside advisor
at the expense of the Corporation in appropriate circumstances. The engagement
of an outside advisor is subject to approval by the Governance and Nominating
Committee.
NEW DIRECTORS
At the direction of the Governance and Nominating Committee, each new
director appointed to the board is required to participate in an orientation
program, which is followed by extensive meetings with management.
BOARD COMMITTEES
The board of directors has established the Governance and Nominating
Committee, the Audit Committee and the Human Resources and Compensation
Committee, as special committees of the board. Terms of reference, which
delineate the mandate of the committee, the composition of the committee, the
frequency of committee meetings and other relevant matters, have been approved
and adopted by the board for each committee. All committees are chaired by and
composed only of outside directors.
The Governance and Nominating Committee is composed of three directors. The
committee is responsible for developing and establishing corporate governance
guidelines and practices for the effective operation of the board of directors
in fulfilling its responsibilities, reviewing and assessing the performance of
the board as a whole and the contribution of individual directors, nominating
prospective directors, coordinating orientation programs for new directors,
recommending and reviewing committee structures and making recommendations with
respect to specific governance issues. The committee holds regularly scheduled
meetings twice each year and other meetings may be held as warranted with
respect to director appointments and other corporate governance issues.
The Audit Committee is composed of four directors. The Audit Committee is
responsible for reviewing and approving the financial statements and public
reports of the Corporation, ensuring the existence and adequacy of internal and
management controls, reviewing the annual audit and communicating directly with
the external auditors as to their findings and reviewing and approving material
accounting policies or estimates. The Audit Committee is also responsible for
conducting formal internal control reviews and overseeing management's reporting
on internal control. The Audit Committee holds regularly scheduled meetings four
times each year in conjunction with the review and approval of quarterly and
annual financial statements and reports to shareholders. Additional meetings may
be held as warranted with respect to public financing initiatives and other
material transactions.
The Human Resources and Compensation Committee is composed of three
directors. The Committee is responsible for assisting the board in determining
the compensation strategies for the Corporation, recommending the forms and
amounts of compensation for directors, officers and other employees and
assessing the performance of officers in fulfilling their responsibilities and
meeting corporate objectives. The committee is also responsible for assessing
the performance of the chief executive officer and reviewing and assisting with
management succession planning and professional development for officers of the
Corporation. The Human Resources and Compensation Committee holds regularly
scheduled meetings two times each year. Additional meetings may be held as
warranted with respect to officer appointments or other compensation related
matters.
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<PAGE> 354
APPOINTMENT OF AUDITORS
Management of the Corporation proposes to nominate Deloitte & Touche,
Chartered Accountants, Calgary, Alberta, for appointment as auditors of the
Corporation, to hold such position until the next annual meeting of the
Shareholders. Deloitte & Touche were first appointed as auditors of the
Corporation on May 10, 1989. ON ANY VOTE THAT MAY BE CALLED FOR AT THE MEETING,
THE SHARES REPRESENTED BY PROXIES IN FAVOUR OF THE MANAGEMENT DESIGNEES WILL BE
VOTED, IN THE ABSENCE OF DIRECTION TO THE CONTRARY, FOR THE APPOINTMENT OF
DELOITTE & TOUCHE AS AUDITORS OF THE CORPORATION, AT SUCH REMUNERATION AS MAY BE
DETERMINED BY THE BOARD OF DIRECTORS.
ADDITIONAL INFORMATION
In addition to this Information Circular and the Corporation's 1997 Annual
Report, a Shareholder may obtain, without charge, upon written request to the
Corporate Secretary of the Corporation at 3000, 400 -- 3rd Ave. S.W., Calgary,
Alberta, T2P 4H2, a copy of the Corporation's latest Annual Information Form and
any documents incorporated therein by reference as filed each year with the
Canadian securities commissions and administrators.
EFFECTIVE DATE
Except as otherwise specified herein, the information set forth in this
Information Circular is provided as of February 28, 1998.
APPROVAL OF DIRECTORS AND CERTIFICATE
The contents of this Information Circular have been approved by the board
of directors of the Corporation.
The foregoing contains no untrue statement of a material fact and does not
omit to state a material fact that is required to be stated or that is necessary
to make a statement not misleading in light of the circumstances in which it was
made.
DATED at Calgary, Alberta this 27th day of March, 1998.
<TABLE>
<S> <C>
(signed) JOHN A. HAGG (signed) JOHN RICHELS
- ----------------------------------------------------- -----------------------------------------------------
John A. Hagg John Richels
Chief Executive Officer Chief Financial Officer
</TABLE>
L-148
